by Swaminathan Venkataraman
(August 11, Singapore City, Sri Lanka Guardian) Just when we thought that 2008 credit crisis was behind us and that we could see a period of moderate global growth, the European banking crisis has hit markets around the world with full force.
In addition, over the past few weeks , the economic data shows slowing growth all over the world with almost no exceptions , with even high growth emerging economies like India, China showing clear signs of slowdown in manufacturing and services sector. The developed world economies of US, Europe and Japan appear to have come to a virtual halt with bleak prospects for consumer and investment spending in the second half of the year 2011.
In summary, banking and housing issues that triggered the crisis in 2008 in western economies remain unresolved and the gigantic stimulus programs initiated by US and some other economies to create demand have petered out with very little to show for it. Lack of job creation, for which the causes are plenty, has created a situation in which there seem to be very few triggers for organic demand growth in developed economies in the coming quarters. This has thrown the growth story for the entire world into question, as developing economies are still strongly linked to developed economies for end demand.
In 2008 , oil prices fell as far as USD 30 after touching a high around USD140. As a consequence of stimulus and low interest rates from US, China, Japan and others, crude had risen to USD100 and above again in 2010/2011. If the economic growth is approaching stall speed for the second half of the year, the key question would be as to whether the global oil prices would head similar lower levels as well.
Just a few months ago, many well known investment banks and analysts were predicting the oil prices to exceed USD200 when the Libyan and Arab crisis started brewing. Instead , we have seen crude oil prices sliding after stabilizing around USD120, and have lost more than USD 30 rapidly, and now less than USD100. The key question for India is will the trend continue, in which case India will benefit immensely through lower oil prices or will the rise in prices resume again.
What appears to be happening is the confluence of a few forces together such as the following ;
1. The drivers of oil demand have been the developing economies like India and China for the past few years. The likely growth slowdown in India and China would lead to lowering of the demand growth estimates
2. The persistence of high inflation, high oil prices and high interest rates in developing countries are starting to pinch the growth in oil consumption and it is evident in slowing sales of automobiles in 2011 compared to 2010
3. Supply factors have stabilized , since the Libyan crisis erupted with Saudi Arabia stating their desire to increase supplies to bring down the prices to around USD 90
4. The dollar which has been in continuous decline for the last two years is showing some gains at the expense of Euro and the need to hedge against dollar losses could decline atleast for the immediate future
5. Speculative froth in oil markets from financial players such as hedge funds are getting liquidated , as growth slowdown and even a potential recession in the second half gets more probable.
As a consequence, there appears to be a building up of momentum in declining commodity prices, not just that of oil. It is a welcome development for a net importer of crude oil like India , as it could cool down the persistent inflation that has built up in the economy.
The key question is how would the western economies react to the coming slowdown.
If substantial additional quantitative easing measures were to be introduced in US and Europe, we could see all the declines erased and oil prices would head for much higher levels as the investment community flees the dollar into commodities like oil.
 Just when we thought that 2008 credit crisis was behind us and...){kind=link}
Post a Comment