Global Growth Outlook Turns Softer on Slowing Emerging Economies
While the developed economies remain fairly resilient, economic data from the emerging countries have turned more subdued recently. Export gains remain restricted as global demand is yet to see sustained revival, despite relatively brighter consumer sentiment in the developed countries. Continued weakness in energy and commodity prices is likely to keep Brazil and Russia in recession in 2016, while also hurting the growth prospects of most countries in Latin America, including Mexico. The steep declines in their currencies have increased inflation in several of these countries, limiting the flexibility of central banks. There are renewed concerns about the Chinese economic outlook, though healthy domestic demand continues to support the economy.
Economic signals from the developed markets remain fairly healthy, helped by strengthening labor markets and buoyant consumer sentiment. Job additions in the U.S. for the month of December were stronger than expected while average wages continue to grow at a moderate pace. The U.S. Federal Reserve announced its first interest rate hike in several years in December, but further rate increases in 2016 are expected to be gradual and will depend on economic trends. Central banks in Europe and Japan could expand their quantitative easing programs if growth rates and inflation remain below targets.
Global equity prices declined in December as lower energy and commodity prices hurt markets in resource exporting countries. Global manufacturing growth moderated in December as most emerging countries reported declines in output. The global services sector continued to expand in December, though at a slower pace when compared to the previous month.
GLOBAL INDUSTRY SPOTLIGHT FOR THE MONTH: ENERGY
Oil prices have plunged to the lowest levels in more than a decade as the market continues to see significant shifts in supply and demand. On the supply side, crude oil from sources such as Iran that were previously shut off from the market could soon start flowing to importing countries. At the same time, large producers such as Saudi Arabia have maintained their production levels. Though output from U.S. shale reserves has seen a moderate decline recently, the fall is not large enough to make a meaningful impact on global supplies. Meanwhile, with global economic growth turning more subdued, there are renewed concerns about energy demand in large markets such as the U.S. and China.
When oil prices started falling during the second half of 2014, many analysts and forecasters were hopeful of a recovery in the medium term. It was suggested that producers group OPEC would restrict output to limit the downside to oil prices, and their export revenues. It was also argued that many of the high cost producers in the U.S. and Canada would shut down their wells as their operations become unviable, and the resulting decline in supplies would revive prices. Demand outlook also appeared more favorable as the global economic trends were healthier. Energy demand in major consuming countries such as the U.S. and China was expected to expand at a healthy pace.
However, most of these expectations and assumptions have been belied and oil prices have now plunged even lower. The energy markets have become so pessimistic that the international Brent crude oil price benchmark has slipped below the levels seen during the 2008 global financial crisis, to the lowest in more than a decade. While the fall in oil prices is a boon to the large importing countries, several of the producing countries are facing a sharp slowdown in economic growth while some of them are in recession.
The lifting of economic sanctions against Iran, following an agreement to limit the country’s controversial nuclear program, could increase global crude oil supplies further in the short term. Iran, an OPEC member, has already announced plans to increase production by 500,000 barrels a day. It is expected that most of this additional output will be exported, and reach importing countries over the next few months.
Meanwhile, other major producing countries such as Russia and Saudi Arabia are finding it difficult to cut production. Government budgets of these countries rely heavily on revenues from oil exports and are hence forced to maintain output to prevent steep cuts in spending. Though countries such as Saudi Arabia have large currency reserves, they have preferred to maintain production and protect their market share.
U.S. shale oil producers were expected to cut output substantially after prices declined below $60 per barrel, their estimated average production costs. However, the fall in production so far has not been significant. The U.S. Energy Information Agency now expects output from U.S. shale reserves to fall by over 500,000 barrels per day in 2016. However, that is only a 10 percent decline from the peak of 5.6 million barrels a day during the first half of 2015.
The International Energy Agency (IEA) now expects oil prices to remain under pressure in 2016 as the market remains oversupplied while demand growth is moderating. The IEA expects output by OPEC members to increase above 32 million barrels a day, which will offset the fall in output by non-OPEC producers to 57 million barrels a day. At the same time, the rate of growth in oil demand is forecast to moderate from 1.7 million barrels a day in 2015 to 1.2 million barrels a day in 2016. This will keep the markets oversupplied by about 1 million barrels a day, the IEA estimates.
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