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Oil prices fall 4% in volatile trade as worries about China, global economy weigh

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Oil prices fall

Oil prices tumbled 4% in volatile trade on Tuesday, pressured by weak demand data from China, a gloomy economic outlook and a stronger U.S. dollar.

Brent futures for March delivery fell $3.81, or 4.4%, to $82.10 a barrel, the largest daily decline in more than three months.

U.S. crude fell $3.33 to $76.93 per barrel, a 4.1% loss, its biggest fall in more than a month. Both benchmarks had risen $1 a barrel early in the session.

“There is plenty of reason for concerns here – the China COVID-19 situation and the fear of recession in the foreseeable future is putting pressure on markets,” Mizuho analyst Robert Yawger said.

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The Chinese government raised export quotas for refined oil products in the first batch for 2023. Traders attributed the increase to expectations of poor domestic demand as the world’s largest crude importer continues to battle waves of infections.

China’s factory activity shrank in December as surging infections disrupted production and weighed on demand after Beijing largely removed anti-virus curbs.

Adding to the gloomy economic outlook, IMF Managing Director Kristalina Georgieva on Sunday said the economies of the United States, Europe and China, were all slowing simultaneously, making 2023 tougher than 2022 for the global economy.

The dollar posted its largest one-day rise in more than 2 week. A stronger dollar can crimp demand for oil as dollar-denominated commodities become more expensive for holders of other currencies.

On Wednesday, the market will scour minutes of the U.S. Fed’s December policy meeting. The Fed raised interest rates by 50 basis points (bps) in December after four consecutive increases of 75 bps each.

Oil stocks at the Cushing storage hub rose about 176,000 barrels to 28.6 million barrels in the week to Dec 30, a broker said, citing Genscape data.

Stockpiles of crude oil were expected to rise by 2.2 million last week, a preliminary Reuters poll showed on Tuesday.

On the supply side, the U.S. government released 2.7 million barrels of oil from the Strategic Petroleum Reserves last week, while oil major Chevron Corp’s Pascagoula, Mississippi, refinery is set to receive the first cargo of Venezuelan crudein nearly 4 years, according to shipping documents seen by Reuters on Tuesday.

U.S. crude output in 2023 is expected to rise by an average of 620,000 barrels per day, according to the latest government estimates, a third less than the roughly 1 million bpd some forecasts called for at the start of the year.

Commerzbank said it expects the global economic outlook to play a “much more important role” in oil price developments than production decisions taken by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, a group known collectively as OPEC+.

The bank expects signs of economic recovery “in key economic areas” to push Brent back towards $100 a barrel, which it said could happen from the second quarter of the year onwards.

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China’s ultra-fast economic recovery

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During china’s lunar-new-year holiday, which ran from January 21st to 27th, tourists flocked to the sprawling Taihao mausoleum in Henan province. Many enjoyed slapping a statue of Qin Hui, a scheming official in the Song dynasty who is notorious for having framed a military hero. One visitor got carried away, striking the statue with the lid of an incense burner. Feelings are running high after Qin’s villainy featured in a new film, “Full River Red”, which topped the box-office charts during the holiday.

This enthusiastic movie-going, sightseeing and statue-slapping is evidence of a surprisingly speedy consumer revival in the world’s second-biggest economy. The mausoleum says it received 300,000 visitors in the festive period, the most in three years. Box-office revenues were not only better than last year, they were also higher than in the year before covid-19. China’s population, subject until recently to mass screening, is now massing at the screens.

The recovery is arriving earlier than expected because the virus spread faster. Since China hastily abandoned its zero-covid regime, infections appear to have passed remarkably quickly. State epidemiologists estimate that at least 80% of the population has already caught the disease. According to official figures, hospital inpatient numbers peaked on January 5th. A second wave of infections was expected after holiday travel spread the disease from cities to villages. But the virus beat the festive rush. The much-feared second wave appears to have merged with the first, notes Airfinity, a life-sciences data firm.

Although the death toll from all these infections is unknown, the economic aftermath is becoming clearer. As people have caught and recovered from the virus, China’s service economy is returning to life. An index of activity outside the manufacturing sector, based on monthly surveys of purchasing managers, jumped from 41.6 in December to 54.4 in January, the second-biggest leap on record. Xiaoqing Pi and Helen Qiao of Bank of America observe that activity in the service sectors “battered by the pandemic”, such as retail, accommodation and dining, has risen sharply.

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On Meituan, an e-commerce platform, some restaurants have amassed waiting lists 1,000 tables long. People used to queueing for pcr tests now wait to pray at popular temples. In Hangzhou, the capital of Zhejiang province, people gathered outside the Linshun temple at 4am to light incense for the God of Wealth. Others who reached the top of the spectacular Tianmen mountain in Hunan province, famous for its vertiginous glass walkways, had to wait until 9pm to catch a cable car back down, according to the National Business Daily, a state newspaper.

Can this frenetic pace be sustained? Optimists point out that households are unusually liquid. Their bank deposits now exceed 120trn yuan ($18trn), over 100% of last year’s gdp, and 13trn yuan more than might have been expected given pre-pandemic trends, according to Citigroup, a bank. These deposits could provide ammunition for a bout of “revenge spending”.

Yet the ammunition may be set aside for other purposes. Much is composed of cash that nervous households kept in the bank rather than using to buy property or ploughing into a mutual fund. They are unlikely now to lavish it on goods and services. More likely, reckons Citigroup, is a bout of “revenge risk-taking”, as households gain confidence to buy bonds and shares that are less safe but potentially more rewarding than a bank deposit. This would lift asset prices and give a much-needed boost to the housing market.

Perhaps a more accurate way to assess the forthcoming spending boom is therefore to look at the gap between household income and consumer spending. In the three years before the pandemic, households saved 30% of their disposable income. During the pandemic they saved 33%. The cumulative result of this extra saving is about 4.9trn yuan. If consumers added that to their spending this year it would increase their consumption by 14% (before adjusting for inflation).

The exact size of the spree will ultimately depend on broader economic conditions. Property prices have fallen and the job market is weak, with youth unemployment still above 16%. But China’s labour market has bounced back quickly after previous covid setbacks, and jobless youngsters count for only about 1% of the urban labour force. With luck, a bit of extra spending will result in higher sales and stronger hiring, in turn motivating additional spending. All this means consumption could account for the lion’s share of China’s growth this year: almost 80%, according to Citigroup, if government spending is included. This would be the highest share for more than two decades.

China’s splurge will make a welcome contribution to global growth. According to the imf’s forecasts, released on January 30th, the country’s economy will grow by 5.2% this year, accounting for two-fifths of the expansion in the world economy. Together, America and the euro area will contribute less than a fifth.

A recent study by economists at America’s Federal Reserve makes a basic point with its title: “What Happens in China Does Not Stay in China”. Their estimates suggest a policy-induced expansion in China’s gdp of 1% adds about 0.25% to the rest of the world’s gdp after a year or two. The authors do not examine spillovers from China’s reopening. But their results give some indication of the possible consequences. If China’s reopening lifts the domestic growth rate from 3% to 5-6% this year, the spillover effects may be 0.5-0.75% of the rest of the world’s gdp, or about $400bn-600bn at an annualised rate.

An uptick in growth would not be an unalloyed good, however. Central banks still want to quash inflation. If higher Chinese demand adds to price pressures, policymakers may feel obliged to slow their economies by raising interest rates or delaying cuts. Lael Brainard, vice-chairwoman of the Fed, has noted that China’s exit from zero-covid has uncertain implications for global demand and inflation, especially in commodities. Christine Lagarde, head of the European Central Bank, has warned it will increase “inflationary pressure”, because China will consume more energy. According to Goldman Sachs, another bank, reopening could add $15-21 to a barrel of Brent crude oil, now trading at around $80.

After the Asian financial crisis in 1997, the Chinese economy helped to stabilise the region. After the global financial crisis a decade later, China’s growth helped to stabilise the world. This year it will once again make the single biggest contribution to global growth. But whereas in the past China’s contribution came from investment spending, now consumption will take the lead. Chinese consumers have traditionally punched below their weight. This year they will hit harder. 

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Why a ‘soft landing’ for the economy is still possible

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Despite the threat of a recession this year, major economies are clinging to the possibility of a soft landing that avoids a painful downturn and widespread layoffs, something that’s typically proved elusive when central bankers raise interest rates to tame inflation.

In recent weeks, there have been hopeful signs. Labour demand is easing in Canada, notably through fewer job vacancies, rather than major downsizings. Wage pressures seem to be abating. Economic growth, while slowing, remains in positive territory. And inflation is fading from multidecade highs in the U.S. and Canada.

On Friday, the U.S. reported a blockbuster gain of 517,000 jobs in January – hardly a sign of an impending recession.

Investors have been pouncing on any shred of positive economic data. The S&P 500 is up 7.7 per cent so far this year, while Canada’s benchmark stock index has jumped by 7.1 per cent.

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Stephen Poloz, former governor at the Bank of Canada, said there’s a great deal of uncertainty in the economic outlook, making it difficult to fully support the soft-landing argument.

However, “I’m pretty confident that we still can have a soft landing,” said Mr. Poloz, who is now a special adviser at the Bay Street law firm Osler, Hoskin & Harcourt LLP. “The ingredients are present.”

Mr. Poloz said this spate of high inflation is different from past iterations, which were usually caused by excess demand – “too many dollars chasing too few goods.” Instead, much of the recent runup in consumer prices can be attributed to soaring energy prices and supply-chain disruptions. Now, those factors are fading away, reflected in shorter delivery times and shipping costs that dropped to prepandemic levels.

“If the supply curve is doing the moving, instead of the demand curve, output still goes up. Jobs still go up. Wages can even go up. But prices go down,” Mr. Poloz said.

Bank of Montreal chief economist Doug Porter recently raised his odds for a soft landing to 35 per cent from 25 per cent.

Mr. Porter flagged three key developments: China has reopened from strict COVID-19 rules, boosting the outlook for global growth; it’s been a relatively mild winter in North America and Europe, helping to drive down energy costs; and there’s been a deceleration in price and wage growth, but so far without rising joblessness.

“Certainly, there is a potential path for things to go quite well over the next year,” he said.

Despite some headline-grabbing layoffs, unemployment rates reside at historically low levels in Canada and the U.S.

In this country, what’s changing is labour demand. The number of job vacancies has tumbled by more than 200,000 from peak levels in the spring. The hope, among many economists, is that companies will dampen their hiring plans, but spare their workers from layoffs.

Brendon Bernard, senior economist at hiring site Indeed Canada, has found that layoff rates are lower now than in the years preceding the pandemic, based on his analysis of Statistics Canada figures.

“It’s pretty tough for small pockets of the labour market to drive aggregate numbers,” he said, referencing the “high-profile” layoffs in the U.S. tech sector. “So far, we haven’t seen a broad-based shift and, in fact, employers have been holding on to workers, at least in most areas of the economy.”

In turn, that is helping consumers. Despite higher interest rates that are meant to curb demand, consumer spending hasn’t fallen dramatically. Purchases are waning in some areas – for instance, people are buying far fewer kitchen appliances than early in the pandemic – but are picking up in others, such as vehicles and travel.

“We’re expecting a resilient consumer will continue to spend,” Michael Miebach, the chief executive officer of Mastercard Inc.

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, told analysts last month.

At the same time, this resilience could make the task of subduing inflation more difficult. Annual rates of inflation have dropped below 7 per cent in the U.S. and Canada, but remain well above their 2-per-cent targets.

The Federal Reserve hiked its benchmark interest rate by a quarter of a percentage point on Wednesday, indicating that a “couple” more rate hikes would be needed to restrain inflation. The Bank of Canada is holding its key lending rate at 4.5 per cent as it assesses whether its policies are restrictive enough to control price growth.

“I actually think the risk – if we’re going to be surprised – is that the Bank [of Canada] and the Fed have to do more because the consumer is so resilient,” Mr. Porter said.

The BMO economist still places the highest odds – 50 per cent – on a mild recession that results in higher unemployment. That view is shared by many analysts on Bay Street.

In large part, that’s because rate increases are felt with a lag, Mr. Porter said. For example, some mortgage borrowers have yet to see the rate hikes materialize in higher monthly payments.

The Bank of Canada is projecting economic growth will stall in the first half of 2023 before picking up later on this year, with growth clocking in at 1 per cent for the full year. Governor Tiff Macklem has said it’s just as likely that the economy will notch “slightly negative growth as slightly positive growth” over the next six to nine months.

Mr. Poloz said inflation has been difficult to forecast because traditional economic models were ill-suited to account for supply shocks. Now that supply is improving, inflation could fall even faster than expected.

“The presence of the supply adjustments, of course, improves the odds of us having a soft landing,” he said. “But it’s not a guarantee. There’s still a fine balance there.”

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Kashmir is bleeding. So is its economy

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On January 1, 2023, as the world celebrated the start of a new year, several families were mourning in the Rajouri district of Indian-administered Jammu and Kashmir. Armed men stormed a village and killed four civilians, injuring six others. Two more civilians were killed the following day.

Just a few weeks earlier, on December 13, India’s Minister of State for Home Affairs Nityanand Rai had presented investment data for Jammu and Kashmir. The numbers spoke for themselves: investments have fallen by 55 percent over the past four years.

Together, the killings and the declining investments contradict two central arguments that have been at the heart of the Indian government’s rationale for the 2019 abrogation of the semi-autonomous status that the region previously enjoyed: that the move would help improve security and spur economic development.

In the past, federal governments in New Delhi have often blamed Jammu and Kashmir’s woes on local governments in power in the region. That’s no longer an excuse that works.

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When the Hindu nationalist government of Prime Minister Narendra Modi eliminated Article 370 of the Indian constitution — which gave Kashmir “special status” — it also carved out the territory of Ladakh from the region. Kashmir’s statehood was withdrawn, and it was made a union territory, directly controlled by New Delhi.

Jammu and Kashmir doesn’t even have the disempowered legislature that other union territories have — the region hasn’t had elections in seven years. Yet it should now increasingly be clear, if it wasn’t previously, that sidelining democratic processes and principles, and steamrolling constitutional provisions, aren’t working in improving the region’s security or economic allure.

Follow the money

The abrogation of Article 370 allowed non-residents to buy and own land in Jammu and Kashmir for the first time. Critics of the region’s previous special status frequently cited restrictions on land ownership as a major reason why private sector industries were reluctant to set up businesses there.

However, data published by the Indian government’s Ministry of Home Affairs — and made public by Rai — calls a bluff on those claims. Total investment in 2021-22 in Jammu and Kashmir stood at $46m, down from $50.5m the previous year, and dramatically less than the $102.8m spent in 2017-18.

While the COVID-19 pandemic no doubt affected Kashmir’s economy, the statistics suggest that wasn’t the biggest factor in investments drying up. After all, the steepest fall in investments came the year that the Indian government ended Kashmir’s semi-autonomous status, before the pandemic, halving from $72.3m in 2018-19 to $36.3m in 2019-20.

Track the bullets

Things aren’t much better on the security front. Although political protests have subsided because most pro-independence leaders have been imprisoned, armed groups appear to have changed their tactics.

Attacks on civilians have increased in the last few years and are increasingly being directed at non-resident Hindus and the minority Kashmiri Pandit community. A S Dulat, the former chief of the Research and Analysis Wing, India’s external intelligence agency, recently highlighted the sophistication of these attacks. The targeted killings, he said, demonstrated that the armed groups have a strong intelligence network and possibly have members within the government.

At least 18 Kashmiri Pandits and non-resident Hindus have been killed in Kashmir since the abrogation of Article 370.

As with the economy, the Indian government’s own data does not support claims that armed groups have been contained. The number of attacks by such groups was 229 in 2021, not significantly different from many previous years: There were 279 incidents in 2017, 322 in 2016, 208 in 2015, 222 in 2014 and 170 in 2013, the year before Modi came to power.

What’s really at play

The Indian government had claimed that Article 370 restricted people’s participation in the political process and led to a few families dominating the politics of the region. However, since 2019, Modi’s Bharatiya Janata Party has taken steps to further disempower local Kashmiris.

First, constituency boundaries for the region’s legislature were redrawn in a way that gives Hindu-majority Jammu a greater say in elections than its population, relative to Muslim-majority Kashmir’s, merits. In effect, that strengthens the chances of the BJP coming to power in Jammu and Kashmir.

Then a revision of the voter list was carried out, giving voting rights to outsiders. Jammu and Kashmir is home to hundreds of thousands of migrant workers and army personnel — if allowed to vote, their electoral influence is going to be significant.

Some Kashmiri leaders have invoked the region’s 1987 elections which were allegedly rigged and were considered a tipping point when the armed separatist movement in Kashmir took off.

Meanwhile, armed groups may continue to adopt attacks on non-local civilians as the mainstay of their strategy to signal their opposition to demographic changes attempted by New Delhi.

While Kashmiris and non-locals alike suffer, there is no reason to expect that Modi and his government will change their policy towards the region. The BJP’s hardline approach towards Kashmir helps it bolster its image in the rest of India as a party that is tough on “terrorism” and “separatism”.

The truth, of course, is more complicated. The BJP’s policies have led to increased insecurity for people living in the region — whether they’re Hindu or Muslim. And there has been no economic payoff, either.

 

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