LONDON (Reuters) - Cyclical indicators point to slower and more uneven growth in the global economy for the rest of this year and into 2019, which means the rise in oil consumption is likely to moderate, especially for distillates like diesel.
Economic growth remains strong in the United States, but in much of the rest of the world clear signs of slackening momentum have emerged since the start of the year.
Strong and synchronised global growth in 2017 has given way to a weaker and more varied picture in 2018 and 2019, which is likely to be less supportive for oil consumption and prices:
These trade-oriented indicators are all correlated closely with one another and with the rate of expansion in the world economy - and they all tell a consistent story of slowing momentum outside the United States.
The softening outlook for world trade has filtered through to the oil market, with Brent calendar spreads and spot prices peaking in April and May respectively.
Medium-density refined fuels, including road diesel, marine gasoil and jet kerosene, are the most heavily geared to the growth of freight given their dominance in the road, rail, shipping and air cargo sectors.
If global trade growth slows, consumption of mid-distillates will also decelerate — though the outlook for these fuels is complicated by the introduction of new marine fuel regulations at the start of 2020.
So far, the main cyclical indicators point to a slackening of growth momentum rather than a more pronounced slowdown in the world economy.
None of the major economic forecasters is predicting a recession later in 2018 or 2019.
However, the number of risk factors in the global economy is multiplying, and includes:
Cocktails of some or all of these risk factors have preceded most recent international economic crises in the last four decades, including the Latin American debt default (1982), Mexico’s debt default and the tequila crisis (1994), Thailand’s devaluation and the Southeast Asian financial crisis (1997) and Russia’s financial crisis (1998).
Compounding the uncertainty, the outlook for fiscal, monetary and trade policies has become confused, with the world’s largest economies all trying to pursue inconsistent policies on tariffs and currency valuations.
The United States is pursuing an expansionary fiscal policy combined with a restrictive monetary policy, causing the real exchange rate to appreciate, while simultaneously trying to reduce the external trade deficit with tariffs.
Fiscal policy has turned strongly pro-cyclical even though the expansion is over nine years old, unemployment is at multi-decade lows, and inflation has accelerated to the fastest rate for more than six years.
China has eased monetary policy and allowed its currency to depreciate since the start of the year to offset the impact of higher U.S. tariffs and counter a slowdown in its domestic economy.
The currencies of the euro zone and the United Kingdom have also weakened, supporting flagging domestic growth but now creating problems with rising imported inflation.
There is a significant possibility that global growth will experience either a mild or a deeper slowdown over the next 12-18 months.
It is, of course, possible the current loss of momentum will turn out to be no more than a temporary soft patch, with growth accelerating again.
On balance, however, the main leading indicators suggest the pace of economic expansion - and the outlook for growth in oil consumption - will continue slowing for at least the next six months.
John Kemp is a Reuters market analyst. The views expressed are his own.
- Slowing global economic momentum holds oil prices in check (Reuters, Aug. 10)
- Distillates hold key to oil prices and global growth (Reuters, Aug. 1)
- World trade points to slowing economic expansion (Reuters, July 26)
- Oil market hits a cyclical pause (Reuters, July 24)
Editing by Susan Fenton