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China’s Economy Is Picking Up, But Oil Demand May Disappoint

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China’s economy grew by 2.2 percent on a seasonally adjusted basis in the first quarter (Q1), a massive improvement on the previous quarter’s 0.6 percent growth. Also positive from the economic perspective was that this was the third straight quarterly expansion after China began to ease COVID-19 restrictions in the second half of last year. This said, unlike much of China’s stellar economic growth from the mid-1990s to before the COVID-19 pandemic hit in 2020, this growth may not translate so directly into equally startling rises in the price of oil.

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The previously very direct correlation between China’s economic growth and oil prices was evidenced in the fact that almost on its own it drove the super-cycle of ever-rising prices for commodities key to its economic growth over that period. One such commodity was oil, which was vital to powering the country’s largely manufacturing-led economic boom during those years. Because of the massive disparity between the sheer scale of China’s energy needs and the paucity of its own oil and gas resources, the country quickly became the big bid in the global oil market. By 2013, it had become the world’s largest net importer of total petroleum and other liquid fuels, and by 2017 it had overtaken the U.S. as the largest annual gross crude oil importer in the world as well. 

It is unsurprising, then, that many in the current oil market have been waiting for signs of a big recovery in China’s economic growth, believing that it will automatically herald a big bounce in oil prices. The first part of this equation may well be taking place, as not only were Q1’s figures good but they may well become better. “The Q1 [GDP] number surprised to the upside, and the momentum of domestic demand puts upside risks to our 5.5 per cent GDP forecast for 2023,” Eugenia Victorino, head of Asia strategy for SEB in Singapore exclusively told OilPrice.com last week. “Looking ahead, low base effects – including the Shanghai lockdown, which lasted more than 60 days in Q2 2022 – will push up the annual prints in Q2 this year, so, assuming domestic demand remains on a path to recovery in the coming months, Q2 GDP will likely rise to around 8 per cent year on year,” she added. Related: Four Scenarios That Could Send Oil Prices To $200

Further signs that China’s economic growth rebound may surprise on the upside have come from its long-beleaguered property sector. Although property price inflation remains in negative territory, prices continue to post monthly improvements, with 64 out of 70 cities now reporting monthly price gains. Home sales have also surprised on the upside, coming from various Tier-1 and Tier-2 cities, with existing homes and China’s state-owned enterprise developers topping the transaction charts, Rory Green, chief China economist for TS Lombard, in London, exclusively told OilPrice.com. There is still caution evident in the market, he said, with the composition of sales indicating that consumers remain concerned about the viability of pre-sales, which make up 70-80 per cent of total transactions. However, highlighted Green, although the speed and magnitude of the rebound in China’s property market remain in question, a bottom appears to have formed in it.

This said, the second part of the equation – that a strong Chinese economic rebound will automatically herald a big bounce in oil prices – is far less certain. The first part of China’s massive economic growth was founded on a huge energy-intensive expansion of its manufacturing capabilities. This also involved the mass migration of new workers from the countryside and into the cities, which required a huge energy-intensive infrastructure build-out. This change marked the second phase of China’s economic growth mix. This continued for years, alongside the third phase of China’s economic growth, which was the rise of a middle class that powered domestic consumption-led demand for goods and services. All these phases to date had the net result of increasing China’s demand for energy exponentially, to the point where it is now – for oil alone – around 15 million barrels per day (bpd). This is around 19 per cent of world demand for crude oil.

The problem for unreconstructed oil bulls is that the nature of this current phase of economic growth in China is not like any that the markets have seen before. “China’s central leadership is relying on reopening and the removal of negative policies – property, consumer internet, and geopolitics – rather than aggressive stimulus, to drive activity,” TS Lombard’s Green told OilPrice.com. “For the first time, a cyclical recovery in China will be led by household consumption, mainly services, as there is a great deal of pent-up demand and savings – about 4 per cent of GDP – following three years of intermittent mobility restrictions,” he added. 

For oil prices, he underlined, it is apposite to note that transportation accounts for just 54 per cent of China’s oil consumption, compared to 72 per cent in the US and 68 per cent in the European Union. In 2022, net oil and refined petroleum imports were 8 per cent lower by volume than the pre-pandemic peak, with infrastructure and export-oriented manufacturing partly offsetting lower mobility and less property construction. “Demand drivers should switch this year, with travel rising and property less negative, while infrastructure and manufacturing slow,” said Green. “The certain outcome is an increase in oil demand – we estimate a 5-8 per cent increase in net import volumes – but this is unlikely to cause oil prices to surge, especially as China is buying at a discount from Russia,” he concluded.

By Simon Watkins for OIlprice.com

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U.S. economic growth for last quarter revised up slightly to healthy 3.4% annual rate

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The U.S. economy grew at a solid 3.4 per cent annual pace from October through December, the government said Thursday in an upgrade from its previous estimate. The government had previously estimated that the economy expanded at a 3.2 per cent rate last quarter.

The Commerce Department’s revised measure of the nation’s gross domestic product – the total output of goods and services – confirmed that the economy decelerated from its sizzling 4.9 per cent rate of expansion in the July-September quarter.

But last quarter’s growth was still a solid performance, coming in the face of higher interest rates and powered by growing consumer spending, exports and business investment in buildings and software. It marked the sixth straight quarter in which the economy has grown at an annual rate above 2 per cent.

For all of 2023, the U.S. economy – the world’s biggest – grew 2.5 per cent, up from 1.9 per cent in 2022. In the current January-March quarter, the economy is believed to be growing at a slower but still decent 2.1 per cent annual rate, according to a forecasting model issued by the Federal Reserve Bank of Atlanta.

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Thursday’s GDP report also suggested that inflation pressures were continuing to ease. The Federal Reserve’s favoured measure of prices – called the personal consumption expenditures price index – rose at a 1.8 per cent annual rate in the fourth quarter. That was down from 2.6 per cent in the third quarter, and it was the smallest rise since 2020, when COVID-19 triggered a recession and sent prices falling.

Stripping out volatile food and energy prices, so-called core inflation amounted to 2 per cent from October through December, unchanged from the third quarter.

The economy’s resilience over the past two years has repeatedly defied predictions that the ever-higher borrowing rates the Fed engineered to fight inflation would lead to waves of layoffs and probably a recession. Beginning in March 2022, the Fed jacked up its benchmark rate 11 times, to a 23-year high, making borrowing much more expensive for businesses and households.

Yet the economy has kept growing, and employers have kept hiring – at a robust average of 251,000 added jobs a month last year and 265,000 a month from December through February.

At the same time, inflation has steadily cooled: After peaking at 9.1 per cent in June 2022, it has dropped to 3.2 per cent, though it remains above the Fed’s 2 per cent target. The combination of sturdy growth and easing inflation has raised hopes that the Fed can manage to achieve a “soft landing” by fully conquering inflation without triggering a recession.

Thursday’s report was the Commerce Department’s third and final estimate of fourth-quarter GDP growth. It will release its first estimate of January-March growth on April 25.

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Canadian economy starts the year on a rebound with 0.6 per cent growth in January – CBC.ca

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The Canadian economy grew 0.6 per cent in January, the fastest growth rate in a year, while the economy likely expanded 0.4 per cent in February, Statistics Canada said Thursday.

The rate was higher than forecasted by economists, who were expecting GDP growth of 0.4 per cent in the month. December GDP was revised to a 0.1 per cent contraction from zero growth initially reported.

January’s rise, the fastest since the 0.7 per cent growth in January 2023, was helped by a rebound in educational services as public sector strikes ended in Quebec, Statistics Canada said.

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WATCH | The Canadian economy grew more than expected in January: 

Canada’s GDP increased 0.6% in January

41 minutes ago

Duration 2:20

The Canadian economy grew 0.6 per cent in January, the fastest growth rate in a year, while the economy likely expanded 0.4 per cent in February, Statistics Canada says.

“The more surprising news today was the advance estimate for February,” which suggested that underlying momentum in the economy accelerated further that month, wrote CIBC senior economist Andrew Grantham in a note.

Thursday’s data shows the Canadian economy started 2024 on a strong note after growth stalled in the second half of last year. GDP was flat or negative on a monthly basis in four of the last six months of 2023.

More time for BoC to assess

The strong rebound could allow the Bank of Canada more time to assess whether inflation is slowing sufficiently without risking a severe downturn, though the central bank has said it does not want to stay on hold longer than needed.

Because recent inflation figures have come in below the central bank’s expectations, “it appears that much of the growth we are seeing is coming from an easing of supply constraints rather than necessarily a pick-up in underlying demand,” wrote Grantham.

“As a result, we still see scope for a gradual reduction in interest rates starting in June.”

WATCH | Bank of Canada left interest rate unchanged earlier this month: 

Bank of Canada leaves interest rate unchanged, says it’s too soon to cut

22 days ago

Duration 1:56

The Bank of Canada held its key interest rate at 5 per cent on Wednesday, with governor Tiff Macklem saying it was too soon for cuts. CBC News speaks with an economist and a couple who might be forced to sell their home if interest rates don’t come down.

The central bank has maintained its key policy rate at a 22-year high of five per cent since July, but BoC governors in March agreed that conditions for rate cuts should materialize this year if the economy evolves in line with its projections.

The bank in January forecast a growth rate of 0.5 per cent in the first quarter, and Thursday’s data keeps the economy on a path of small growth in the first three months of 2024. The BoC will release new projections along with its rate announcement on April 10.

Growth in 18 out of 20 sectors

Growth in January was broad-based, with 18 of 20 sectors increasing in the month, StatsCan said. The agency said that real estate and the rental and leasing sectors grew for the third consecutive month, as activity at the offices of real estate agents and brokers drove the gain in January.

Overall, services-producing industries grew 0.7 per cent, while the goods-producing sector expanded 0.2 per cent.

In a preliminary estimate for February, StatsCan said GDP was likely up 0.4 per cent, helped by mining, quarrying, oil and gas extraction, manufacturing and the finance and insurance industries.

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Yellen Sounds Alarm on China ‘Global Domination’ Industrial Push – Bloomberg

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US Treasury Secretary Janet Yellen slammed China’s use of subsidies to give its manufacturers in key new industries a competitive advantage, at the cost of distorting the global economy, and said she plans to press China on the issue in an upcoming visit.

“There is no country in the world that subsidizes its preferred, or priority, industries as heavily as China does,” Yellen said in an interview with MSNBC Wednesday — highlighting “massive” aid to electric-car, battery and solar producers. “China’s desire is to really have global domination of these industries.”

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