Gisma Globalization & Economic Development

Table of contents

0. EXECUTIVE SUMMARY        

1. introduction        

2. Current state of global economy        

3. outlook and challenges for the next 5 years        

3.1. General outlook        

3.2. Outlook for major economies        

4. Implications for the oil industry        

5. conclusion        

6. Annexes        

Annex 1: GDP definition        

Annex 2: GDP growth rates until 2017        

Annex 3: GDP growth projection until 2020        

Annex 4: Commodity prices        

Annex 5: Development stages of countries        

Annex 6: Employment growth        

7. SOURCES        

0. EXECUTIVE SUMMARY

The world economy is partly still compensating the financial crisis, as several countries could still not reach pre-crisis growth levels in 2014. Different events had impact on the global economy, like geopolitical tensions (e.g. Ukraine and Russia, Middle East), significant oil price decline (due to change of OPEC’s policy) and a fragile situation in the Euro area. There has been a divergent development in 2014:  While the United States could exceed the pre-crisis growth level, the Euro area is still struggling with low growth rates (recession), partly high unemployment rates, low competitiveness and low interest rates with the risk to enter or already have entered a secular stagnation. Also the growth rates of developing countries did not meet expectations and forecasts due to several global and regional factors, e.g. regional tensions, slow implementation of structural reforms and policies, low commodity prices, weak global demand. China’s ongoing transition to a more consumption-driven economy further slowed economic growth with the risk of an economic hard landing. Overall the global economy faces a low-level supply-demand equilibrium environment.

The global outlook projects a further growth of global GDP within the next years, supported by further recovery of Europe, continued growth in US, China and India and further development in North and Sub-Saharan Africa. However, major challenges will remain regarding investments, employment rates, appropriate monetary and fiscal policy frameworks for demand growth and structural reforms to improve political systems. Frameworks are needed to support efficient resource allocation in order to increase productivity and improve competitiveness.

Furthermore the developments in major economies like US (monetary policy), China (soft or hard landing), Europe (preventing secular stagnation and stabilizing the Euro), Japan (recovery) and India (implementation of structural reforms) will have effects on the global economy in terms of financial markets and global trade. Opportunity for global growth could become new emerging markets and the continued development in Africa improving urbanization and living conditions.

As the oil price significantly declined in 2014 mainly due to weaker-than-expected demand, higher-than-expected supply (mainly in US) and OPEC’s policy change, the low oil price will contribute to the growth rates in 2015, especially in oil-importing countries. However, low oil prices will put at risk new project investment in the oil industry, but will facilitate efficiency gains due to cost-reduction needs to maintain profitability levels. The oil demand is expected to increase during the next years resulting generally from global growth and in particular from China’s and India’s demand as well as higher demand from transportation business, so that oil production and investments in new projects will probably increase again to ensure the right level of oil supply.

1. introduction

This board report provides a macroeconomic overview on the current state of the global economy. Following the outlook of the projected world economic growth and related challenges and constraints, the implications for the oil industry are outlined and finally concluded.

2. Current state of global economy

Generally the major worldwide institutions like International Monetary Fund (IMF), World Bank and United Nations (UN) report a modest growth of the world economy (see annex 1 for GDP definition) at 2.6%-3.4% in 2014 and a projected growth of approximately 3.0-3.5% in 2015 (see annex 2 for detailed overview on growth rates). According to the IMF emerging markets and developing economies accounted for three-fourths of global growth in 2014.^[1] The global GDP was around 77,302 bn $ in 2014.^[2]

The world economy seems still to compensate the effects from the global financial crisis as the major economies only partly could fully recover (e.g. US and UK) while other countries (e.g. the Euro area) still could not reach earlier peaks in their growth rates before the crisis. Key reasons for the recovery have been accommodative monetary policies, falling commodity prices and improving labor markets. All major developed economies in North America, Europe and developed Asia have actually generally an upward trend for the first time since 2011. However there is a remarkable divergence in growth of the developed economies, as the United States and the United Kingdom could partly exceed previous high growth rates before the crisis, while the Euro Area and Japan lag behind^[3]. For example, the US could reach a growth rate above 2% in 2014, while most countries in Euro area are significantly below or even facing a recession.

The recovery of the US has been highly supported by accommodative monetary policy (bolstered capital market valuations, and easing fiscal consolidation) and improving labor markets (robust job creation and gradually increasing, wage growth and decreasing unemployment).^[4]

Especially financial fragmentation, high unemployment, structural rigidities, and unresolved fiscal challenges are reasons for the slow down of the recovery of the Euro area (e.g. uncertainty about Greece, Spain, Portugal or Ireland).^[5]. There is a high risk that the Euro area enters or already entered a secular stagnation^[6]. However the current account surplus in the Euro area remains significant, reflecting ongoing import compression, competitiveness gains in the periphery and persistent surpluses in Germany.^[7]