Falling Oil Prices
Global Economics Weekly Brief
The most obvious sign of falling oil prices is the lower cost of filling up at the petrol station, but the effects are widespread and for most people, welcome. When will the oil price stop dropping? Also, will we see 2015 with higher oil prices than ever?
They’ve fracked it. Oil’s slide from $110 per barrel in the summer to less than $65 now has many causes, though the biggest catalyst is rising US shale oil production. The US has accounted for almost 90% of the rise in global output this year which when combined with sluggish demand has turned prices around. Swings in oil prices used to be a great fear for economies around the world, but now we are much less exposed to this volatility. Research from the Bank of England suggests the 40% slide should add about 0.3% to GDP growth next year. That’s welcome, but doesn’t herald a boom.
Income-ing. It's all about income growth. According to the Bank of England's NMG survey, if interest rates were to rise by two percentage points with no increase in incomes, then 12% of households would have to take some kind of action to be able to meet their debt repayments. But if incomes rose 10% over the same period, just 4% of households would have to resort to finding extra work, cutting back on other spending or other similar measures. And while a rate rise would be tough for the 60% of borrowers who say they would decide to cut spending, 10% of the savers in the survey said that they would look to increase spending. Given this, the BoE estimates that a two percentage point rise in rates would cut overall household spending by 1%, something which will not go unnoticed by the members of the MPC. Will 2015 see big rises in the bank interest rate from the BoE?
Paint it black. Retail sales rose by 0.9% on a like-for-like basis in November. That compares to a 0.6% rise in November 2013. The reason for this rise, according to the British Retail Consortium which helps compile the figures, was Black Friday. And indeed household appliances (which includes 50” TVs) was the best performing category. Black Friday is a US import, a post-Thanksgiving sale heralding the start of the Christmas sales period. And in the UK, those giving thanks include electrical-good retailers, the larger supermarkets and of course consumers who like joining in the rush for bargains. This was the first year that Black Friday captured the imagination, and cash, of UK consumers. But whether it actually boosted sales, rather than simply bringing them forward, remains to be seen. Credit cards are at bursting point!
Not so fast. Neither British industry nor construction had a memorable start to Q4. British industrial output contracted by 0.1% between September and October, with manufacturing down by 0.7%. Similarly, output in the construction sector declined by 2.2%, with house building down 0.8% and spending on new infrastructure projects down 1.8%. Before we start reaching for the panic button we should note that whilst growth is slowing, output is still higher than it was a year ago. Slower growth is something we’re going to need to get used to as we look ahead to 2015. The UK is still not in good shape in many sectors!
Puzzling. MPC member Martin Weale shared his thoughts on the UK's poor productivity performance since the recession. Most analyses have focused on the domestic situation but Weale stresses that the UK's track record is by no means unusual internationally. Output per hour is lower than it was at the start of 2008, a situation also found in Germany and Norway. While US productivity barely paused during the recession and is now up 10%, there are the faintest signs there, too, of an emerging productivity puzzle. The MPC expects productivity to improve over the next two years but Weale highlights that expectations could be disappointed yet again. And if that happens, rates might need to rise earlier than currently expected. The future is a big challenge!
"The past is a foreign country," wrote L.P. Hartley in The Go-Between. So, too remains London. The latest regional accounts show that UK gross value added per resident - roughly the amount produced in an area divided by the number of people living there - was £23,000 in 2013. It ranged from over £40,000 in London to under £17,000 in Wales. For local areas the gap was greater still: from £136,000 in Inner London, West to £11,000 in Anglesey. But remove London and the highest figure is under £39,000, in Berkshire. London is so different that it makes little sense to include it in comparisons of the performance of the UK's regions. Some many differences over all UK region!
We'll pick this up in the New Year. It will take more than a lower oil price to kick life into the Euro zone. The European Central Bank's latest auction of cheap loans to financial institutions was met with muted demand, as it was back in September. In other words, boosting lending across the region across is proving to be very challenging. Meanwhile, Euro zone industrial production in October disappointed. Output has flat lined since the middle of last year, is 4% below the post-crisis high reached in 2011 and 12% below the pre-crisis peak. It's clear that more policy firepower is required. The ECB will be giving outright quantitative easing serious consideration in the New Year. The Euro zone is in total decline with increasing unemployment that will impact further in 2015!
The Euro zone recovery, already anaemic. Has run out of steam without much impact on the region’s unemployment rate. Joblessness in the Euro zone equals more than half of Spain’s population. And with inflation falling further the European Central Bank may finally be prepared to provide an appropriate response. 2015 is going to be a very interesting year!
Controlled, for now. China is still managing to keep new credit growth controlled, or certainly relative to its recent past. New credit over the past four months is around 10% less than the corresponding period last year. It means that the stock of credit is growing at around 16%y/y, which is the slowest pace since early 2006. The authorities are showing restraint for now. The question is whether they can continue to do so as growth slows further. The future is slower growth (if any) and borrowing to high, the bubble is about to burst!
The return of volatility. After a summer of calm financial markets woke up with a start last week. There were big falls on the stock exchanges around the world as markets grew more pessimistic about global growth. The pain was felt in commodity prices too, with oil now down to $65 a barrel (or even lower). Weaker growth forecasts translated into delaying the expected date that interest rates start rising around the world. In response yields on bonds in the UK, US and Germany fell sharply. But not everyone moved in the same direction. Government borrowing costs spiked in Spain, Italy, Portugal and Greece. A lack of growth is a big threat to the credit-worthiness of these countries, something investors have started worrying about again. Money lending to these countries is drying up! Global growth, where is it? Trouble on the way with Russia putting pressure on Europe and world unrest!
In the world of the year 2015 will continue to fight Ebola/Vladimir Putin/Islamic State Terrorism and many more challenges. Western Europe is back in an economic rut/Japan`s recovery is faltering big time/China looks as if its heading for its slowest growth since 1990. There are good things happening too, Like, many challenges they are continuous year by year and we all have to look at new ways to recover and bring growth globally. Everyone should read history and then we could plan better for the future!
Further details below make interesting reading.
Borrowings globally. Are we on the way back to the many financial disasters the world have experienced before? Are bankers etc leading the world to another financial crisis? Read history and it will show you the future! When will the world change its aptitude on greed?
About the Author Colin Thompson
Colin is a former successful Managing Director of Transactional/Document Manufacturing Plants, Document Management/Workflow Solutions companies and other organisations, former Group Chairman of the Academy for Chief Executives, Non-Executive Director, Mentor - RFU Leadership Academy, Mentor - Coventry University, Mentor - The Chartered Institute of Personnel and Development, author/writer Business Advice Section for IPEX, Graphic Display World, NewsUSA, GraphicStart, many others globally, helping companies raise their `bottom-line` and `increase cash flow`. Plus, helping individuals to be successful in business and life in general. Author of several publications, research reports, guides, business and educational models on CD-ROM/Software/PDF and over 2000 articles and 35 books published on business and educational subjects worldwide. Plus, International Speaker/Visiting University Professor.
--- --- ---
Written and submitted by:
Dr Colin Thompson
Direct: + 44 (0) 121 247 4589
Mobile: 07831 588310
Office: + 44 (0) 121 244 1802
The Cavendish Academy
--- --- ---
Falling Oil Prices - Global Economics Weekly