When the global growth forecast for 2011 was first published in July 2010, growth expectations stood at 3.7%. While this is only negligibly higher than the current forecast of 3.6%, it masks the fact that the slowdown in advanced economies has been sharper than expected. OECD growth expectations for 2011 currently stand at 1.6%, significantly lower than the initial forecast of 2.0%. The US, in particular, has faced a much more challenging first half than originally anticipated. The tragic events in Japan have also impacted growth expectations.
While the Euro-zone performed relatively well initially, sovereign debt challenges in some countries in the region have emerged as a key threat going forward. This indicates that the related issues are deeper than originally thought and that solving them might be far costlier than previously forecast. Even if the fallout is contained, the sovereign debt crisis is likely to result in much slower economic growth in the Euro-zone over the months to come as austerity measures weigh on the expansion. The risks for the Euro-zone are considerable, given major refinancing volumes of the financially weaker Euro-zone countries in the coming quarters combined with rising yields. Consequently, the global growth forecast for 2012 has been adjusted sharply lower since the first estimate in July 2011 of 4.1% to currently stand at 3.7%.
While policy makers in developed countries have been trying to sustain momentum in economic growth, major emerging economies have been actively seeking to avoid overheating in their economies. Over the past six months, major developing economies have tried to curb their rising inflation rate through tight monetary policies. However, more recently, they have been faced with the growing downside risk of decelerating growth in their major trading partners in the developed economies, as reflected in lower exports and declining foreign investments.
Many concerns regarding the slow-down of the global expansion have been similarly highlighted in other forecasts. This includes the most recent World Economic Outlook by the IMF which has reduced its global growth expectations for 2011 from 4.3% in July 2010 to 4.0%, as well as the consensus forecast which now stands at 3.8% compared to 4.1% in July 2010. As a result, forecasts are moving toward the more cautious view that the OPEC Secretariat has held since the initial forecast. In oil markets, crude oil prices have been increasingly volatile since May with a general pattern of steady rises followed by sharp drops. ICE Brent has been trading in a widening range of around $100-120/b. This volatility has been more pronounced amid rising concerns about the economic uncertainties and associated risks in OECD countries. Since late April 2011, crude price direction has broadly tracked fluctuations in equity markets, which has kept oil prices sensitive to ongoing macroeconomic developments.
In response to the increasingly fragile outlook for the world economy, the FTSE 100 index experienced a loss of almost 9% and the euro has declined 10% against the dollar on the back of growing uncertainties in the Euro-zone. The shifting economic mood has also resulted in an even larger drop in Brent futures prices of nearly 13% over this same period. Reflecting the growing uncertainties in the global economy, world oil demand in 2011 has also been adjusted lower from the initial forecast growth of 1.2% to now stand at 1.0%. However, the revisions since the initial forecast have been much lower than other forecasts which began the year with a more optimistic economic outlook.
The adjustments have been carried out not only in OECD countries, but also in some emerging countries, including China, which has been a key driving force behind global oil demand growth in recent years. So far, clear signs of weakening demand have had only a limited impact on overall oil market fundamentals. However, in the current economic environment, it is necessary to remain alert to the risks of a growing market imbalance.
