Economic expansion in the slow lane and will be there a while

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 US, 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 last year 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:

The OECD’s composite leading indicator, which covers the advanced economies plus China, India, Russia, Brazil, Indonesia and South Africa, peaked in January but has since fallen and slipped below trend in May and June.

World trade volume growth also peaked in January at almost 5.7 per cent year-on-year but had nearly halved to less than 3 per cent by May, according to the Netherlands Bureau for Economic Policy Analysis.

The new export orders component of JP Morgan’s global purchasing managers’ index peaked in January, showing the fastest increase for seven years, but has since fallen every month and showed only marginal growth in July.

South Korea’s Kospi-100 share index, a useful proxy for global trade growth given the country’s heavy export orientation, peaked in January but has since fallen and hit a 15-month low this month.

Air freight volumes are still growing but more slowly than in 2017, reflecting the completion of the restocking cycle and a slowdown in manufacturing orders, according to the International Air Transport Association.

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 US.

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, although 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 this year or in 2019.

However, the number of risk factors in the global economy is multiplying, and includes:

Rising US interest rates Rising value of the US dollar

Rising emerging market debt

Rising corporate leverage Deteriorating credit quality

High oil prices (especially in non-dollar economies)

Rising tariffs and trade disputes

Increasing diplomatic uncertainty

Cocktails of some or all of these risk factors have preceded most recent international economic crises in the past four decades, including the Latin American debt default (1982), Mexico’s debt default and the tequila crisis (1994), Thailand’s devaluation and the South East 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 US 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 more than 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 US 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 to 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.