Monday, October 26, 2015

China overtakes the US – a symbol of shifting global economic power 

Author: John Hawksworth, Chief Economist, PwC UK 

John Hawksworth photo

According to one measure of economic size, GDP at purchasing power parities (PPPs), China could overtake the US as early as 2014 according to new estimates by the World Bank published last week. This is three years earlier than projected in our own World in 2050 study in January 2013, and five years earlier than previous IMF estimates.

The reason for this earlier overtaking date is not, however, that China is growing faster than expected or that the US is growing slower. Rather it reflects new estimates of the relative price levels in the two countries, suggesting that average price levels in China, compared to the US, were comparatively lower in 2011 than had previously been estimated.

As a result, the purchasing power of Chinese national income (GDP at PPPs) is now estimated to have been around 87% of US levels in 2011, compared to previous estimates of just under 70% of US levels in that base year. Since Chinese real GDP growth has been around 7-8% per annum since 2011, with US growth only around 2-3% per annum, calculations by the FT suggest that China could narrowly overtake the US on this measure as early as 2014, with a clear gap emerging in 2015.

This is all rather technical, and if we were to use current market exchange rates, rather than PPPs, to compare GDP levels, we would find that the Chinese economy is only around 60% of the size of the US, with takeover unlikely to happen until the late 2020s. Since businesses have to operate with market exchange rates, rather than PPPs estimated by economic statisticians, this means that the size of the Chinese market in dollar terms will still be quite a lot smaller than the US for a decade or more to come.

Furthermore, since China’s population is more than four times as great as the US, its average income levels (even measured using PPPs) are less than a quarter of those in the US. While there are increasing numbers of wealthy individuals in China, as well as a burgeoning middle class, it’s still not a rich country and may not reach current Western levels of average incomes until the middle of the century.

These caveats are important to note, but they don’t change the bigger picture that global economic power is shifting to the East, as documented in our recent megatrends analysis. This isn’t just about China as these new GDP at PPP estimates also show that:
  • India has risen to third place in the world rankings on this measure, overtaking Germany and Japan since 2005
  • Indonesia has risen to tenth place, only narrowly behind France and the UK and ahead of Italy.
Three other emerging economies (Brazil, Russia and Mexico) also now rank in the top 12 economies in the world on this measure, driven in part by strong demand from China for their exports of oil, gas, food and metals. This is likely to continue to keep global commodity prices high and volatile for some time, though it will also stimulate new sources of supply such as shale gas and shale oil in the energy sector.

It’s also clear that several emerging economies have run into turbulence recently, which is a reminder that these are still relatively high risk places to do business. Businesses and other investors therefore need a nuanced approach to assessing these risks based on a deep understanding not just of economic factors, but also a broader range of social, political, regulatory and cultural dimensions.

This is what we aim to cover in our ESCAPE index, which was published for the first time in February. This index shows that economies like India, Brazil, Indonesia, Turkey, Mexico and Nigeria, despite their great long-term potential, still have a long way to go to get their social, political and legal institutions up to the level needed to graduate to the advanced economy club.

So, yes, global economic power is shifting, but this will not be a smooth, linear process. Businesses need to develop appropriate strategies to tackle the opportunities and the risks presented by China and other emerging markets.

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Wednesday, October 7, 2015

Can oil prices really fall to… $20 per barrel?

Goldman Sachs stirred energy investors last month when its head of commodity research warned of rising risks of oil prices falling as low as $20 per barrel, in a message that was reiterated on Tuesday.
"The risk of $20 is driven by what we call a breach in storage capacity, meaning that you have supply above demand, you fill every storage tank on planet earth and then you have nowhere to put it," Jeff Currie, head of commodity research at Goldman told CNBC from the annual Oil & Money conference in London.
"(Then) supply has to come down in line with demand. The only way you get that correction is prices crash down to cash costs, which for a U.S. producer, is somewhere around $20 a barrel."
However, Fatih Birol, the executive director of the International Energy Agency (IEA), told CNBC on Tuesday that low prices would prompt U.S. producers to cut output, creating upward price pressure.
"When we look at the next few quarters, we expect U.S. oil production to decline because of low oil prices and in Iraq, production growth will be much slower than in the past. And the demand is creeping up," Birol told CNBC on Tuesday from the Oil & Money conference.
"So therefore, to think that oil prices will be with us forever may not be the right way of thinking."
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The U.S.-led revolution in the extraction of shale gas via hydraulic fracturing or "fracking" has pushed more oil into the market. At the same time, the OPEC group of oil-producing countries have stood firm in the face of international pressure to cut prices. Meanwhile, Iraq has increased production, while demand growth for energy has slowed, largely due to the deacceleration in the Chinese economy. 
This has helped catalyze an historic collapse in the price of crude oil, with both Brent and WTI trading below $50 per barrel, down from around $110 per barrel until June 2014.
Whether or not U.S. shale players will cut production in response to ongoing low prices is a moot point however. They could instead respond by increasing production in order to satisfy creditors eager for results. Plus, against some odds, shale producers have managed to lower productions costs, although these remain high in comparison to conventional oil production.
Despite its warning, Goldman Sachs said there was a less than 50 percent chance of oil falling to $20 per barrel. Instead, its base case scenario for 2016 was $45 per barrel—a level that Birol said was still too low for U.S. shale producers to maintain current production.
"It is proven it is a very resilient type of production, but this level of prices, $45, $50 is not good enough to induce reinvestments and for production to continue to grow. Therefore, we expect as of next year, production growth will decline in the United States," Birol told CNBC.

OPEC will 'cooperate with anybody…even US'

The secretary general of OPEC, Abadall El-Badri, also forecast that oil production from countries outside his group would fall next year. 
"All I can tell you is that we see improvement," he told CNBC from the Oil & Money conference in on Tuesday.
"We see that non-OPEC supply is declining and in 2016, we see there is an increase in demand … so in a nutshell, there is a balance in the market in 2016. How much this will reflect on the price I really cannot tell," he later added.
El-Badri added that he was open to discussing production concerns with the U.S., or any other non-OPEC country.
"In general, OPEC, as far as I can say as secretary general, we have no problem with cooperating with anybody. Even with the United States producers. If they want to talk to us, we are willing talk to them, because now the situation is really affecting almost everybody. United States, OPEC, non-OPEC, everybody," he said.

S&P takes ratings action on 14 energy firms

Standard & Poor's (S&P) appeared more bullish on oil prices than Goldman, forecasting on Tuesday that Brent oil would average $55 per barrel in 2016, up from an average of $50 for the remainder of this year. 
Nonetheless, the weak price environment saw the ratings agency take ratings action on 14 oil and gas exploration and production companies on Tuesday.
S&P cut the ratings on EnQuest and Tullow Oil to "B" and "B+" respectively and placed BPEniNostrumRepsolStatoil and the State Oil Company of Azerbaijan Republic on "CreditWatch Negative."
"Actual and forecast financial results in 2015 are typically weak or very weak," said S&P on Tuesday.
"Correspondingly, credit metrics are likely to be at or below our guidelines for ratings and we see very substantial negative DCF (discounted cash flow) for European oil and gas majors in particular."
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Source:   .,   ACNBC

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