The global economy is once again showing some worrying signs of a slowdown, opening up a major downside risk to oil prices.
Global trade volumes are declining for the first time since the end of the 2008-2009 financial crisis, according to Reuters. Between December and February trade volumes contracted by 0.8 percent compared to the same period a year earlier. John Kemp of Reuters says the global economy is "one more shock away from recession," pointing to a series of worrying indicators, including a contraction in cargoes at Hong Kong's International Airport (the world's busiest air cargo hub), falling volumes of shipping containers through the U.S. Port of Long Beach, and declining freight rail shipments in the U.S.
The metrics are jarring and stand in sharp contrast to the new record high reached in the S&P 500 in recent days.
There are other cracks that are beginning to become more visible. For instance, the sales of farm equipment in the U.S. are plunging, as American farmers are facing multiple headwinds from Trump's trade war, falling crop prices and severe weather. Farm profits fell to $69.4 billion in 2018, about half of the $136.1 billion in 2013, according to Bloomberg. "The retaliatory tariffs that China has levied on almost all U.S. agricultural exports has seriously hurt farmers, further depressed already stressed commodity prices, and has had a chilling effect on equipment manufacturers," Kip Eideberg, vice president of government affairs for the Association of Equipment Manufacturers, told Bloomberg. Related: Russia Says Tainted Oil For Europe Was Deliberately Contaminated
The IMF downgraded its estimate for global growth in early April, the fourth downgrade to its 2019 forecast in nine months. The Fund cited "the escalation of US-China trade tensions, macroeconomic stress in Argentina and Turkey, disruptions to the auto sector in Germany, tighter credit policies in China, and financial tightening alongside the normalization of monetary policy in the larger advanced economies have all contributed to a significantly weakened global expansion."
While growth is still positive, roughly 70 percent of the global economy is decelerating, the most widespread "synchronized slowdown" since 2011.
But not everyone is convinced that the economy is taking a turn for the worse. Goldman Sachs wrote in a recent report that major market pitfalls have been reduced, thanks to active government policy. "[T]he dovish pivot by the US Fed, reinforced by other [developed market] central banks, substantially reduces [developed market] recession fears," Goldman Sachs wrote. The investment bank said that macroeconomic tail risks have been "truncated."
In a separate report, Bank of America Merrill Lynch also laid out a better-than-expected scenario relative to where we were at the start of the year: The U.S. economy is still doing well; China's government stimulus "seems to be working"; and dovish policy from multiple central banks, not just the U.S. Fed, have kept the expansion going. But the bank also noted that emerging market economies are doing worse than expected, particularly in Turkey and Argentina, where inflation and currency depreciation continue to wreak havoc. Related: U.S. Pipeline Boom Could End In Crisis
A few near-term events to watch include the Fed's press conference on Wednesday, which should offer an update on the central bank's outlook for the U.S. and global economy, as well as insights into the bank's plans for the rest of the year. On Tuesday, China will release PMI data, which could offer more clues into the health of the Chinese economy.
Meanwhile, the U.S. and China begin the latest round of trade talks in Beijing this week, and the two sides are supposed to be nearing the end of the negotiations. The success or failure of the talks will go a long way in determining the near-term trajectory for the global economy. A removal of tariffs will provide a lift, while a breakdown in negotiations will be seen as uniformly damaging.
So far, global oil demand forecasts have not been changed in any big way. In the IEA's April Oil Market Report, the agency stuck with its 1.4 million-barrel-per-day demand growth forecast. In fact, the IEA said the "resilience of demand has received less attention than the vicissitudes of production," even as it acknowledged a wide range of views on the subject.
For now, demand still appears to be solid, but the potential for an economic downturn looms.
By Nick Cunningham of Oilprice.com
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Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. More
Comments
Contrary to Mr Kemp’s projections, global oil demand is solid and the fundamentals of the global economy are robust.
Oil prices are underpinned by a strong global oil demand adding 1.45 million barrels a day (mbd) this year over 2018, rock solid Chinese oil imports projected to hit 11 mbd this year, a Chinese economy growing at 6.4% this year beyond the projected 6.3%, a confirmed slowdown in US production and a tightening global oil market caused by OPEC+ production cuts.
A delay in reaching a deal to end the trade war between the United States and China continues to cast some uncertainty over the global economy. However, sooner or later a deal will be reached because President Trump badly needs it. The US economy has been suffering far more adversely than China’s economy as manifested by a 49% decline in US farm sales’ profits from $136.1 bn in 2013 to 69.4 bn in 2018 as a result of the trade war. China’s economy is 28% bigger based on purchasing power parity (PPP) and more integrated in the global trade system that the US economy, hence its ability to withstand the trade war better.
Still, an end to the trade war will remove uncertainty and provide a lift to the global economy.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London