Assessment of The Global Economy - March 2016

Source: OPEC_RP160302 3/13/2016, Location: Europe

After estimated global GDP growth in 2015 of 2.9%, the global economy is forecast to grow by 3.1% . The current 2016 growth forecast is somewhat below the initial figure of 3.4% in July 2015. Major revisions to this number have just materialized in the past two months, when it became clearer that challenges in the emerging and developing economies are becoming more pronounced and that OECD economies are also dealing with an increasing number of issues. While some upside potential exists, the growth risk remains skewed to the downside. Increasing volatility in various asset markets such as equities and crude oil reflects the rising uncertainties about the future. This situation is also attracting short-term speculators and, as a result, price swings may become increasingly exaggerated and not reflect developments in the real economy.

In the US, labour market improvements have continued to support the economy. At the same time, industrial production has been affected by low oil prices, which has led not only to a declining value in output, but also to a significant cut in investments in the energy sector. The negative effect of the decline in output in the energy sector, in combination with the loss of some momentum in manufacturing and services, will weigh on growth numbers this year.

Meanwhile, the Euro-zone has enjoyed a cyclical recovery, partly supported by the ECB. However, the ongoing weakness in the banking sector, re-emerging deflation, continuing sovereign debt-related issues in Greece and the uncertain outcome of the upcoming Brexit referendum will weigh on the region this year. Together with the deceleration in domestic demand growth, this is likely to lead to slightly lower economic growth in the current year.

Japan has just recently reported negative GDP growth in 2Q15 and 4Q15. Moreover, the economy is facing numerous issues, ranging from declining exports, the rising value of the yen to the US dollar, slowing domestic demand and low inflation. Hence, GDP is expected to rise only marginally in the current year.

Within emerging and developing countries, the growth trends are increasingly different. Brazil and Russia are expected to see a second year of recession. Despite slowing momentum, China’s GDP growth is holding up relatively well, while India is expanding its growth level this year. For several developing countries, the significant slow-down in commodity prices has put a considerable strain on their economies. This will make it difficult for them to improve their economic growth substantially. The decline in global trade, partly due to sluggish demand from major economies for raw materials and products, as well as lower commodity prices in general, is particularly harmful to these economies, making it necessary to provide governmental-led support.

Despite the ongoing challenges, the global economy is expected to improve in the current year, especially in countries where GDP is more oil intensive, such as in major emerging economies. Given the current price trend, oil demand is likely to grow this year, broadly in line with the average of the last three years. Provided some of the existing upside potentials materialize, improving global economic growth can lead to higher oil demand later this year.

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