Oil prices received a jolt mid-week on rumors that OPEC+ might cut deeper and also because of a surprise drawdown in EIA inventory data. Nevertheless, economic cracks continue to dominate the narrative.
The latest string of downbeat economic data came from Germany, where its manufacturing sector seems to be stuck in negative territory. The IHS Markit/BME Germany Manufacturing PMI showed a slight uptick in October to 41.9, up from 41.7 in September, but below market expectations of 42. Anything below 50 is considered a contraction in activity, so the figures are rather staggering. The number for September was the worst reading since the financial crisis.
“Hopes of a return to growth in Germany in the final quarter have been somewhat dashed,” Phil Smith, an economist at IHS Markit, which produced the PMI data, told Bloomberg. “Perhaps most concerning are the signs of increasing strain on the domestic economy.” For the broader Eurozone, the IHS Markit Composite Purchasing Managers’ Index stood at 50.2 in October, which essentially means that economic activity, if not contracting, is stagnating across the continent.
But while Germany is exhibiting particularly weakness, the malaise is a global phenomenon. U.S. business equipment declined for a second consecutive month in September.
Caterpillar made news this week when it reported disappointing third quarter figures and cut its full-year profit forecast. The equipment manufacturer is viewed as somewhat of a proxy for industrial activity. Caterpillar said that its earnings would take a hit as major companies hold off on equipment purchases due to concerns about the health of the global economy.
Many analysts – including private investment banks but also the IMF, WTO and many central banks – tend to circle back to a familiar theme when discussing the current economic deceleration. “This slowdown in growth mainly reflects the ongoing weakness of international trade in an environment of persistent global uncertainties, which continue to weigh on the euro-area manufacturing sector and are dampening investment growth,” outgoing European Central Bank President Mario Draghi told reporters.
In other words, the fallout from the U.S.-China trade war is being felt globally.
China’s GDP expanded by 6 percent in the third quarter, the weakest growth rate in roughly three decades. “China’s economy is grappling with both external and internal headwinds,” Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc, told Bloomberg.
The U.S. Federal Reserve is expected to cut interest rates again next week, the latest in a global wave of monetary easing intended to stimulate the economy. It’s unclear if central banks can do enough to head off the economic slowdown.
The big question at this point is if the manufacturing recession bleeds over into the services sector. Services make up a larger portion of the U.S. economy, and that portion of the economy has proved more resilient to date.
“A further deterioration in jobs growth adds to the risk that the trade-led weakening is spreading further to the household sector, which could dampen growth further as we head towards the end of the year,” Chris Williamson, IHS Markit’s chief business economist told the WSJ.
Another major problem for the global economy is the prospect of “peak car,” as the Wall Street Journal put it this week. Global auto sales have declined – not just in terms of growth, but on an absolute basis – and because auto manufacturing is such a large sector in many major economies, the contraction helps explain the manufacturing slowdown.
Worse, auto sales may not rebound to previous peaks. Sales declined in 2018, are on track to decline this year, and could fall again in 2020. The largest auto market in the world, China, is facing headwinds on two fronts – a slowing economy and market saturation.
The woes afflicting the auto sector have the potential to hit oil demand on two fronts. Lower car sales in general means weaker growth to oil consumption. However, at the same time, electric vehicles are claiming a growing portion of the shrinking pie, a double-whammy to oil demand, as independent journalist Gregor Macdonald points out. Even when the auto market rebounds, sales of the internal combustion engine may not return to previous peaks.
By Nick Cunningham of Oilprice.com