By John Kemp/London
No one likes to predict recession, but the global economy is likely to experience a significant slowdown before the end of 2019, and the slowdown may be necessary to relieve upward pressure on oil prices.
In its latest World Economic Outlook, the International Monetary Fund forecasts the global economy will expand at 3.9% in both 2018 and 2019, slightly faster than the 3.7% achieved in 2017.
But beneath the sanguine headline numbers, the outlook provides a long list of downside risk factors, including mounting trade tensions, rising interest rates, political uncertainty and complacent financial markets.
“Growth generally remains strong in advanced economies, but it has slowed in many of them, including countries in the euro area, Japan, and the United Kingdom,” the IMF admits.
“Even US growth is projected to decelerate over the next few years, however, as the long cyclical recovery runs its course and the effects of temporary fiscal stimulus wane”. The broad global expansion that began roughly two years ago has plateaued and become less balanced, according to the Fund.
The principal economies are still growingly rapidly, with high levels of business and consumer confidence, and contributing to optimism among investors, but there are signs of a potential future slowdown.
Global trade volumes are still increasing but the growth rate has slowed significantly since the second half of 2017, according to the Netherlands Bureau of Economic Policy Analysis. Leading economic indicators monitored by the OECD have weakened since the start of the year and point to slower expansion over the next six to nine months.
The OECD says that growth momentum is stable in the United States and Japan but is easing in the United Kingdom, Germany, France, Italy and Canada.
At global level, the expansion is exhibiting increasing signs of maturity, with commodity prices and interest rates rising and capacity constraints emerging in some sectors.
For example, aircraft manufacturers Boeing and Airbus are struggling to deliver orders on time as they strive to expand production and their supply chain. US trucking firms are complaining about the lack of qualified drivers, and US airlines are preparing to cut their schedules in response to rising fuel costs.
In the United States, where growth remains strong, the expansion now shows unmistakeable signs of being at a late stage. The US economy has been expanding for over nine years, according to the Business Cycle Dating Committee of the National Bureau of Economic Research.
The current expansion is already the second-longest on record and will overtake the long boom of the 1990s if the economy is still growing in July 2019.
Unemployment is close to its lowest level for 50 years and at or below the levels seen at the height of previous booms.
Industrial production is growing at some of the fastest rates for 20 years.
The Institute for Supply Management’s composite index shows one of the broadest increases in manufacturing activity in the last 70 years. And the University of Michigan’s consumer sentiment index shows household confidence close to multi-decade highs.
But consumer prices are rising at the fastest rate since early 2012, cancelling out hourly wage growth, despite a strong economy.
And the yield curve for US government securities shows signs of inverting, which has often been a harbinger of previous economic slowdowns.
All these indicators show strong cyclical behaviour; in every case, they point to an expansion fast-approaching the top of the cycle. The global economy is rapidly running out of spare capacity and nowhere is that more obvious than in the oil market.
The oil market’s unused production capacity has fallen to multi-decade lows as a result of strong consumption growth and a series of output disruptions in Venezuela, Libya and elsewhere.
Iran sanctions threaten to reduce spare capacity even further from the start of November, pushing it down to the lowest level since the oil shocks of 1973/74 and 1979/80.
Global oil consumption has surged by an average of 1.7mn barrels per day in each of the last three years, and is forecast to rise by a similar amount in 2018 and 2019.
The result is that the global oil industry is being “stretched to the limit”, according to the International Energy Agency. Oil prices have already climbed by more than 75% over the last year, putting upward pressure on global inflation, though they have subsequently eased back slightly in recent days.
* John Kemp is a Reuters market analyst. The views expressed are his own.
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