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World Economy Review - October 2017

The Organization of the Petroleum Exporting Countries (OPEC) released the 2017 version of its World Oil Outlook. Perhaps the most interesting projection in the new Outlook calls for an increase in demand for oil of 15.8 million barrels a day between 2016 and 2040.

World demand in 2016 totaled 95.4 million barrels a day and the latest OPEC forecast pushes that to 111.1 barrels a day in 2040. That total comprises a decline of 8.9 million barrels a day in demand from developed (OECD) countries and an increase of 24 million barrels a day in developing countries` demand. China alone will add 6.0 million barrels a day to its demand over the forecast period and India will add 5.9 million barrels a day.

The Outlook also foresees a decline in demand growth: Long term global oil demand growth is forecast to decelerate steadily, falling from an annual average of around 1.3 mb/d during the period 2016–2020 to only 0.3 mb/d every year between 2035 and 2040. This deceleration is a result of slowing GDP growth, assumed oil price increases, a structural shift of economies towards a more service-oriented structure, efficiency improvements as a result of tightening energy efficiency policies and/or technological improvements, and oil facing strong competition from other energy sources.

Among those other energy sources is electricity as fuel for electric cars. Last summer, Bloomberg New Energy Finance (BNEF) forecast that electric vehicles will account for 54% of global car sales by 2040. BNEF further expects just over a third of all cars on the road in 2040 to be electric. That amounts to 530 million electric vehicles in a global fleet of about 1.56 billion, up from 1.28 billion in 2015.

In OPEC`s Outlook, the cartel reaches a similar number for the EV market by 2040 in what it calls its Sensitivity Case:

Focusing on the penetration of EVs [electric vehicles] in the passenger car segment, an alternative sensitivity has been developed: the Sensitivity Case. In this sensitivity, a more optimistic view is taken on the penetration of EVs with the assumption that annual EV sales reach 80 million by 2040. This would mean that three out of every five cars sold in 2040 would be electric.

Under the assumption that the increasing EV penetration in the passenger car segment in the Sensitivity Case spreads, at least partially, to commercial vehicles, particularly in the medium-duty segment, oil demand in 2040 is reduced by 2.5 mb/d compared to the Reference Case, to total 108.6 mb/d. Moreover, global oil demand is estimated to plateau around this level in the second half of the 2030s.

For OPEC, this Sensitivity Case is, in fact, a worst case scenario if BNEF`s projection turns out to be true. There are about 1.2 million EVs on the world`s roads and highways today, and if there are 530 million by 2040 that yields a compound annual growth rate of more than 27%.

While demand for oil and refined petroleum products for transportation still will be substantial, by 2040 the handwriting could be on the wall. OPEC`s projection of a plateau of 108.6 million barrels a day of demand by the late 2030s implies that there is a cliff somewhere at the other side of that plateau. The only question is how steeply it drops off.

Economy of the United States

The U.S. economy grew faster than expected at a healthy 3% rate in the July-September quarter, per AP, despite political uncertainty and the impact of Hurricanes Harvey, Irma, and Maria. The 3% GDP figure came in above the estimated forecast of 2.6% and followed 3.1% growth in Q2.

U.S. industrial production rose 0.3 percent in September. The rates of change for July and August were notably revised; the current estimate for July, a decrease of 0.1 percent, was 0.5 percentage points lower than previously reported, while the estimate for August, a decrease of 0.7 percent, was 0.2 percentage point higher than before. The estimates for manufacturing, mining, and utilities were each revised lower in July.

The U.S. trade deficit widened slightly more than expected in September as rising exports of goods and services were offset by a jump in imports. The Commerce Department said the trade gap increased 1.7 percent to $43.5 billion. August`s trade deficit was revised up to $42.8 billion from the previously reported $42.4 billion. Economists polled by Reuters had forecast the trade shortfall rising to $43.2 billion in September.

In September, exports of goods and services increased 1.1 percent to $196.8 billion, the highest level since December 2014. Goods exports were also the highest since December 2014, while exports of services hit a record high. Imports of goods and services increased 1.2 percent to $240.3 billion in September. Food imports were the highest on record as were those of capital goods. Imports of non-petroleum imports were the highest since March 2015.

The Labor Department said its Consumer Price Index jumped 0.5 percent last month after advancing 0.4 percent in August. September`s increase was the biggest since January and pushed up the year-on-year gain in the CPI to 2.2 percent from 1.9 percent in August. Economists polled by Reuters had forecast the CPI surging 0.6 percent in September and accelerating 2.3 percent year-on-year.

The so-called core CPI rose 0.2 percent in August. In the 12 months through September, the core CPI increased 1.7 percent. The year-on-year core CPI has now increased by the same margin for five consecutive months.

The US unemployment rate fell to its lowest level in nearly 17 years in October while job creation resumed climbing after the two late-summer hurricanes, the Labour Department reported. The jobless rate fell to 4.1%, down a tenth of a point from September, the lowest the US economy has seen since December 2000.

Employers added 261 000 net new positions as businesses reopened in the wake of Hurricanes Harvey and Irma, although the rebound was much lower than economists had forecast. The result still showed US labour markets in good health, easily bouncing back from the storms that idled the US energy hub in southeast Texas and forced millions of Floridians to flee their homes.

Economy of the European Union

Seasonally adjusted GDP rose by 0.6% in both the euro area (EA19) and in the EU28 during the third quarter of 2017, compared with the previous quarter, according to a preliminary flash estimate published by Eurostat, the statistical office of the European Union. In the second quarter of 2017, GDP had grown by 0.7% in both zones.

Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 2.5% in both the euro area and in the EU28 in the third quarter of 2017, after +2.3% and +2.4% respectively, in the previous quarter.

In August 2017 compared with July 2017, seasonally adjusted industrial production rose by 1.4% in the euro area (EA19) and by 1.7% in the EU28, according to estimates from Eurostat, the statistical office of the European Union. In July 2017, industrial production rose by 0.3% in the euro area, while it fell by 0.3% in the EU28.

In August 2017 compared with August 2016, industrial production increased by 3.8% in the euro area and by 3.9% in the EU28.

The first estimate for euro area (EA19) exports of goods to the rest of the world in August 2017 was ˆ171.5 billion, an increase of 6.8% compared with August 2016 (ˆ160.6 bn). Imports from the rest of the world stood at ˆ155.4 bn, a rise of 8.6% compared with August 2016 (ˆ143.1 bn). As a result, the euro area recorded a ˆ16.1 bn surplus in trade in goods with the rest of the world in August 2017, compared with +ˆ17.5 bn in August 2016. Intra-euro area trade rose to ˆ132.9 bn in August 2017, up by 7.6% compared with August 2016.

The first estimate for extra-EU28 exports of goods in August 2017 was ˆ145.5 billion, up by 6.4% compared with August 2016 (ˆ136.7 bn). Imports from the rest of the world stood at ˆ150.5 bn, up by 3.9% compared with August 2016 (ˆ144.8 bn). As a result, the EU28 recorded a ˆ5.1 bn deficit in trade in goods with the rest of the world in August 2017, compared with -ˆ8.2 bn in August 2016. Intra-EU28 trade rose to ˆ249.3 bn in August 2017, +7.7% compared with August 2016.

Euro area annual inflation is expected to be 1.4% in October 2017, down from 1.5% in September 2017, according to a flash estimate from Eurostat, the statistical office of the European Union. Looking at the main components of euro area inflation, energy is expected to have the highest annual rate in October (3.0%, compared with 3.9% in September), followed by food, alcohol & tobacco (2.4%, compared with 1.9% in September), services (1.2%, compared with 1.5% in September) and non-energy industrial goods (0.4%, compared with 0.5% in September).

The euro area (EA19) seasonally-adjusted unemployment rate was 8.9% in September 2017, down from 9.0% in August 2017 and from 9.9% in September 2016. This is the lowest rate recorded in the euro area since January 2009. The EU28 unemployment rate was 7.5% in September 2017, stable compared to August 2017 and down from 8.4% in September 2016. This remains the lowest rate recorded in the EU28 since November 2008. These figures are published by Eurostat, the statistical office of the European Union.

Eurostat estimates that 18.446 million men and women in the EU28, of whom 14.513 million in the euro area, were unemployed in September 2017. Compared with August 2017, the number of persons unemployed decreased by 116 000 in the EU28 and by 96 000 in the euro area. Compared with September 2016, unemployment fell by 2.076 million in the EU28 and by 1.463 million in the euro area.

Economy of Japan

Japan`s real gross domestic product slumped 0.7% on the month in September, declining for the first time in five months, according to data released by the Japan Center for Economic Research. Factors related to external demand pushed down growth by 0.4 percentage point. Exports sank 5.5% amid declines in shipments to major trading partners aside from China. U.S.-bound exports, which make up a large proportion of the total, tumbled 8.1%. Capital spending slid 1.3% as well. Consumer spending was basically flat, edging up only slightly from August.

Japan`s industrial production fell 1.1 percent in September compared to the previous month, according to data released by the government. The drop in industrial production came after a 2 percent increase in August, according to the data reviewed and published by the Japanese Ministry of Economy, Trade and Industry.

In relation to the same month of 2016, Japanese industrial production increased by 2.5 percent. Industrial production is expected to increase by 4.7 percent in October and drop by 0.9 percent in November, according to data from a survey conducted by the ministry among Japanese companies.

Japanese exports jumped 14.1% in September from a year ago helped by exports of semiconductors, the latest data from Japan`s finance ministry showed. It is the tenth consecutive month Japan`s exports have risen. Meanwhile imports increased 12% year-on-year in September, the ninth straight gain.

Japanese exports increased to JPY 6,811 billion in September from JPY 5,969 billion the previous year. Imports for September rose to JPY 6,164 billion, bringing the trade balance to JPY 670 billion, remaining in the black for a fourth consecutive month.

Japan`s core consumer prices increased 0.7 percent in September from a year earlier, the government said. According to the Ministry of Internal Affairs and Communications, the core consumer price index (CPI), which excludes fresh food prices because of their volatility, although unchanged from August, rose for the ninth straight month in the recording period. The ministry attributed the increase to rising energy costs.

Japan`s unemployment rate held steady for the third straight month in September, in line with expectations, data from the Ministry of Internal Affairs and Communications showed. The jobless rate came in at 2.8 percent in September, the same rate as in August.

The jobs-to-applicants ratio also held steady at 1.52 in September. It was forecast to rise slightly to 1.53 percent. The number of unemployed people totaled 1.90 million in September, up from 1.89 million in the preceding month.

Economy of Russia

Russia`s GDP expanded by 2.4% in September 2017 in year-on-year terms and by 2.2% in the third quarter overall, Minister of Economic Development Maxim Oreshkin said. Previously the ministry of freshly appointed Oreshkin had upgraded the GDP outlook to over 2% in 2017-2020, hoping for a structural lift from labour productivity measures yet to be implemented. "Overall the ongoing [economic] recovery is continuing," Oreshkin said. RosStat agency estimated that Russia`s GDP expanded by 2.5% y/y in the second quarter and by 0.5% in the first quarter of 2017.

Russia`s industrial production rose by 0.9 percent year-on-year in September 2017, missing market expectations of 1.6 percent and following a 1.5 percent gain in the previous month. The slowdown was driven by a contraction in extraction of raw materials (-0.1 percent from 2.9 percent in August), electricity and gas (-0.1 percent from 0.3 percent), and distribution of water, sewage (-3.6 percent from -3.4 percent). By contrast, manufacturing growth accelerated to 1.1 percent from 0.7 percent in August. On a monthly basis, industrial production increased by 1 percent.

Russia`s trade surplus widened by 42.7 percent to USD 6.612 billion in August 2017 from USD 4.633 billion in the same month a year earlier and way above market expectations of a USD 5.60 billion surplus. Exports increased 25.3 percent from the previous year to USD 28.97 billion and imports rose at a slower 21 percent to USD 22.35 billion. In January to August, the trade surplus widened sharply to USD 70.19 billion from USD 55.52 billion in the same period of 2016.

Russia`s consumer price inflation declined to 2.7 percent year-on-year in October 2017 from 3 percent in the previous month and below market expectations of 2.8 percent. It was the lowest inflation rate since the series began in 1991, as prices rose at softer pace for food, housing and clothing. Annual core inflation rate dropped to 2.5 percent from 2.8 percent in the previous month. On a monthly basis, consumer prices rose 0.2 percent after a 0.1 percent fall in September, while markets were expecting a 0.3 percent gain.

Russian unemployment rate fell to 5 percent in September 2017 from 5.2 percent in the same month of the previous year but above market expectations of 4.9 percent. The number of unemployed people decreased by 200 thousand from the previous year to 3.82 million.

10.11.2017 22:29:05

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