Offshore Capitalist

Monthly Oil Market Report (October 09) – OPEC

Extracts from the Monthly Oil Market Report.

The world economy now appears to be entering into a new phase, moving from a period of containing the crisis to one of economic recovery. Over the course of this year, financial markets have stabilized and the outlook for the world economy has greatly improved. The second quarter is now seen to mark the bottom of the recession, a view that has been reflected in comments by world leaders and policy-makers at the G-20 summit in Pittsburgh, as well as at the annual meeting of the IMF/World Bank in Istanbul. As a result of the improving economic conditions, forecasts for world GDP have been revised higher. While global GDP is still expected to decline by 1.2% this year, the forecast for 2010 now shows positive growth of 2.7%, up from an initial forecast of 2.3% in July.

Although there is widespread consensus that there is a turnaround in the global economy, the pace and strength of the recovery is still not clear. This is due to the fact that so far the improvements have been primarily driven by government stimulus along with inventory rebuilding. However, the current level of fiscal stimulus will be difficult to sustain as government spending is creating large deficits, particularly in the advanced economies. With regard to inventories, the rebuilding has occurred to compensate for the sharp reduction in manufacturing output that took place earlier in the crisis. As much of this job is done, the impact is expected to diminish.

Going forward, the strength and sustainability of the recovery will depend on achieving a re-balancing in two areas. The first is a shift from public to private consumption. For that, it is recognized that exit strategies should be carefully planned and coordinated to ensure that they do not take place too early — which would undermine the economic recovery — or too late which could result in a fiscal crisis as debt to GDP ratios rise dramatically. Moreover, reviving consumer demand poses a big challenge given the high and rising unemployment rates which now stand at close to 10% in the US and Euro-zone. Consumer indebtedness along with tight credit conditions will also dampen demand. Thus, growth is not expected to pick up sufficiently in the developed countries without further stimulus.

Therefore, global recovery would require a second re-balancing, which would involve a shift in global demand and trade patterns. Specifically, this would be a shift from domestic to external demand in industrialized countries, especially the US, and the complementary shift in Asia, particularly China. The international nature of these challenges highlights the need for continued multilateral consultations and coordination, a fact that has been clearly recognised during the recent G-20 meeting as well as the annual meeting of the IMF/World Bank in Istanbul.

Given the current economic environment and the difficulties ahead, the world is more likely to experience slower growth rather than the sharp rebound that has generally characterized previous economic recoveries.  The recovery in the US will certainly play an important role in determining the pace and strength of the global upturn. If US private and foreign demand do not pickup sufficiently as the fiscal stimulus fades, then this could create a further challenge for the world recovery.

via Monthly Oil Market Report (October 09).

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