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Growth in Oil States Falters

Chris Kuehl, Ph.D.

The days of near exponential growth in the oil producing regions are over—at least for the time being. Not only have global oil prices settled into the $50 per barrel range for the last couple of years, the oil producers in OPEC have tried to bolster the prices with restrictions on output. Thus far, that tactic has had little impact on the price of oil, but it has further limited the revenue these states have been able to generate. There are various plans under development to broaden the economic base for these nations, but this is a slow process at best. There are all manner of challenges that come with that transition.

Between 2000 and 2015, the growth rate for this region was a very healthy 6.7%. Almost all of this growth was attributed to the high prices for oil. As these per barrel rates fell, so did the rate of growth. There are few who see a major rebound in the price for oil because there are far more producers with leverage than in the past. Then, there is the assertion the world has been experiencing peak demand. This has meant that non-oil growth is more important than ever. The assessment of the region’s growth by the International Monetary Fund (IMF) holds that this growth was a scant 1.6% in 2016 and is expected to grow to perhaps 2.6% this year, but then fall back to 2.45% in 2018. The alternatives to oil are limited and the states in this region have issues that complicate that transition.

The Saudi government has been taking an aggressive position on economic development under Crown Prince Mohammad bin Salman, but the strides made also underscore the challenges. The kingdom has just allowed women to drive. The rationale for the decision was that they are needed in the workforce. The problem is that there are plenty of other impediments as far as female engagement in the economy. The other oil states vary in terms of their social progress, but they all face the same basic development issues.

These are small populations and that limits the impact of the consumer. The bulk of spending is done by the tourists that come to places like Dubai. The wealthy spend, but more often than not, they spend in other countries. The next most obvious source of national revenue would be exports, but beyond oil, gas and energy-related products, there has been very little. There is no opportunity to export food—these are all countries that import the bulk of that food. The manufacturing community is very small and unlikely to grow as there are simply too few skilled workers. The bulk of development seems to be concentrating in the high-tech sectors of health care and security, but these provide limited opportunity as yet.

The IMF has been pushing these states to reduce the subsidies that are routinely paid to the population. This fiscal drain was supported by those high oil prices, but there is too little money to handle that demand now. The region has also suffered from “brain drain” as many of the most talented have left to make their fortunes elsewhere—Europe, Asia and the U.S. The countries need to keep these people, but that means growing fast enough to provide them a reason.

Mid-Term Growth in the Eurozone Sustainable

GDP growth in the eurozone accelerated in the first half of 2017 as the economic recovery became broader based, continuing the upward trend begun in 2013, the Economist Intelligence Unit (EIU) said in a recent report.

The EIU credits an improved labor market and fiscal balances, as well as looser monetary policies among the reasons for the acceleration. “The economic recovery has become more broad based and self-contained, and should be sustained over the medium term,” the group said in its report, Who Needs More Integration Anyway? Next Steps for Growth and Reform in the Euro Zone. “We expect robust real GDP growth rates of close to 2%.”

The report also concludes the following:

  • The bloc’s capacity to deal with future crises has been greatly improved by European Central Bank (ECB) intervention and reform efforts by European policymakers, including the establishment of an EU banking union and a permanent rescue fund.
  • Strengthening the existing structures would be helpful, but proposals such as increased fiscal transfers are unlikely to strengthen the eurozone’s ability to withstand economic shocks and are not necessary for the recovery to continue in the coming years.
  • Increased fiscal transfers are not an effective solution to the main long-term threat to the survival of the euro: economic underperformance in peripheral member states. If this persists, it will undermine the political will to keep the bloc together. Addressing this underperformance is mainly a task for domestic policymakers.

The EIU, however, points out a number of “significant downside risks” to its outlook:

  • A slowdown in reforms across the eurozone since the peak of the debt crisis as well as slow-to-recover credit channels.
  • Uneven recovery and the likelihood of subdued wage growth.
  • A disorderly withdrawal of the U.K. from the EU in 2019, particularly for economies with close trade ties.
  • Peripheral economies with bond yields anchored by the quantitative easing (QE) program.
  • A breakdown between Greece and its eurozone creditors, which could lead to Greece’s departure from the eurozone.

“However, as we discuss elsewhere, the QE program and an improvement in the institutional underpinnings of the eurozone mean that we now expect any financial market contagion from a rise in bond yields in these countries to be manageable, and the institutional design of the eurozone to no longer be a direct threat to the growth outlook,” the EIU said.

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What Would NAFTA’s End Mean for Mexico?

Extended negotiations and comments following a fourth round of North American Free Trade Agreement (NAFTA) talks have raised concerns about risks and growing uncertainty among the U.S., Canada and Mexico.

If the U.S. withdrew from NAFTA, Mexico would face significant uncertainty, with an immediate confidence shock and short-term market volatility, said Fitch Ratings, in a new report, which explores the effect of a U.S. withdrawal on the Mexican economy. Already-modest growth would slow through the medium term, it notes. A repeal of NAFTA would result in defaulting to World Trade Organization rules, which are not comprehensive; tariffs could rise on certain Mexican export sectors.

“If the U.S. was to abandon the 25-year-old deal, the impact would be serious and negative,” said NACM Economist Chris Kuehl, Ph.D. “The estimate is that over 250,000 jobs would be lost in sectors such as motor vehicles (around 17,000) and food (around 26,000). The majority of the lost jobs would be in the service sector, as there is a major industry involved with servicing and managing trade with Mexico.”

Automobile production is the chief driver of Mexico’s manufacturing sector, according to Wells Fargo Securities. Automotive and other diversified manufacturing would be the most exposed sector in case of a NAFTA withdrawal, due to the interconnectedness of supply chains, Fitch said. On the other hand, the high level of supply chain integration, as well as the cost advantages of manufacturing in Mexico, would still act as an incentive for production, depending on the scale of the new tariffs.

“The investment community has started to believe this break might actually happen. It has started to impact stock prices for companies in manufacturing, construction and retail,” Kuehl said. However, “there has been an outpouring of support for the agreement from most of the business community.”

Credit professionals who do business in Canada, Mexico and the United States have an opportunity to share real-time credit and collection experiences in FCIB’s latest International Credit & Collections survey, which also covers Australia and New Zealand. The survey is open to all credit and risk management professionals, and each participant will receive the survey results.

Election Calendar

Nov. 19 – Chile, Chilean Chamber of Deputies

Nov. 19 – Kyrgyzstan, President

Nov. 19 – Chile, Chilean Senate

Nov. 19 – Chile, President

Nov. 26 – Honduras, Honduran National Congress

Nov. 26 – Honduras, President

Global Roundup

Ex-Argentina Vice President Boudou arrested in corruption case. Amado Boudou, who had been former Argentine President Cristina Fernandez’s economy minister and vice president, was arrested on corruption charges on Nov. 3, becoming the second major official in her government to face detention. (Reuters)

EU sets sights on Latin American trade deals. The European Union’s landmark agreement with Cuba entered into force last week, marking a new chapter that aims for increased trade and diplomacy between the EU and the Latin American region. (Global Trade Review)

South Korea, China move to resolve disputes and hold summit talks. South Korea and China will push to normalize their ties badly strained over the deployment of a contentious United States missile defense system in the South, both countries announced Oct. 31, with Seoul saying their leaders are set to hold summit talks next week. (Business Mirror)

Philippines spotlights anti-graft measures in bid to woo U.S. aid. On Nov. 3, the Philippinesdefended its graft-fighting efforts in a bid to convince the United States to continue providing development assistance after an initial five-year grant of $434 million expired in May last year. (Reuters)

A year after the peace treaty, violence is on the rise in Colombia. Colombia completed ratification of a landmark peace treaty with the FARC on November 24, 2016. A year later, the initial excitement has transformed into serious doubts about the deal’s success. (Global Risk Insights)

Catalonia crisis: Sacked ministers held by Madrid court. Eight sacked Catalan ministers have been remanded in custody by a Spanish high court judge over the region's push for independence. (BBC)

Liberia's Supreme Court halts election preparation over fraud accusations. Liberia’s Supreme Court has halted preparations for this week’s presidential run-off vote between former soccer star George Weah and Vice President Joseph Boakai until it considers a challenge to first-round results by a losing candidate who alleged fraud. (Reuters)

Missing piece of global growth jigsaw starts to fall into place. A missing piece in the global growth jigsaw appears to be falling into place. Spurred by higher profits and buoyant stock markets, some of the world’s best-known companies from Amazon.com Inc. to Volkswagen AG are ramping up spending on new plants and equipment after years of caution. For an international economic expansion already gathering speed, that could prove a boon. (Bloomberg)

75,000 Brexit finance job losses ‘plausible.’ Job losses totalling 75,000 in banking and insurance because of Brexit are “plausible,” Bank of England Deputy Governor Sam Woods said on Nov. 1. Woods told lawmakers that the 65,000 to 75,000 estimate was drawn up by consultants Oliver Wyman and not the Bank of England, but that it was within a “plausible range of scenarios.” (HSN)

Trump to extend Asia trip, attend East Asia Summit. U.S. President Donald Trump has decided at the last minute to extend a marathon trip to Asia, after criticism that he was expected to miss an East Asia regional summit. "We're actually staying an extra day in the Philippines," Trump said just before he departed on Nov. 3, a decision that was confirmed by senior White House officials. (CNA)

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations