Global Investing

Oil price slide – easy come, easy go?

One of the very few positives for the world economy over the second quarter — or at least for the majority of the world that imports oil — has been an almost $40 per barrel plunge in the spot price of Brent crude. As the euro zone crisis, yet another soft patch stateside and a worryingly steep slowdown in the BRICs all combined to pull the demand rug from under the energy markets, the traditional stabilising effects of oil returned to the fray. So much so that by the last week in June, the annual drop in oil prices was a whopping 20%. Apart from putting more money in household and business purses by directly lowering fuel bills and eventually the cost of products with high energy inputs, the drop in oil prices should have a significant impact on headline consumer inflation rates that are already falling well below danger rates seen last year. And for central banks around the world desperate to ease monetary policy and print money again to offset the ravages of deleveraging banks, this is a major relief and will amount to a green light for many — not least the European Central Bank which is now widely expected to cut interest rates again this Thursday.

Of course, disinflation and not deflation is what everyone wants. The latter would disastrous for still highly indebted western economies and would further reinforce comparisons with Japan’s 20 year funk. But on the assumption “Helicopter” Ben Bernanke at the U.S. Federal Reserve and his G20 counterparts are still as committed to fighting deflation at all costs, we can assume more easing is the pipeline — certainly if oil prices continue to oblige.  Latest data for May from the OECD give a good aggregate view across major economies. Annual inflation in the OECD area slowed to 2.1% in the year to May 2012, compared with 2.5% in the year to April 2012 – the lowest rate since January 2011. While this was heavily influenced by oil and food price drops, core prices also dipped below 2% to 1.9% in May.

JP Morgan economists Joseph Lupton and David Hensley, meantime, say their measure of global inflation is set to move below their global central bank target of 2.6% (which they aggregate across 26 countries)  for the first time since September 2010.

After peaking at 3.9%oya in September 2011, global inflation is expected to dip to 2.4%oya this month. If our top-down model is correct, global consumer price inflation could slide to just 2.1% by
year-end, 0.5%-pt lower than both our forecast and central bank targets. The risks are most skewed to the downside for the developed markets (DM), where consumer prices are more
sensitive to moves in oil prices.

The JPM economists say this modeled outcome undercuts their own house forecast and if the model is correct, this could accelerate monetary easing by central banks and boost consumer spending.

Three snapshots for Thursday

OECD growth forecasts released today show the euro zone countries lagging behind other G7 countries:

Reuters latest asset allocation polls showed global investors cut government debt from portfolios in March:

Germany’s unemployment rate fell to a record low of 6.7% in March, bucking the trend in other euro zone countries:

Greece’s interest burden, post-PSI, will remain huge

It seems Greece has finally reached a deal on austerity measures needed for a bailout. But what about PSI?

(ECB President Mario Draghi just said he heard it was close to a deal. It’s been close for a few weeks though…)

JP Morgan says Greek PSI is hardly going to change the heavy interest burden on the country and the issue of default will inevitably come up.

What worries the BRICs

Some fascinating data about the growing power of emerging markets, particularly the BRICs, was on display at the OECD‘s annual investment conference in Paris this week. Not the least of it came from MIGA, the World Bank’s Multilateral Investment Guarantee Agency, which tries to help protect foreign direct investors from various forms of political risk.

MIGA has mainly focused on encouraging investment into developing countries, but a lot of its latest work is about investment from emerging economies.

This has been exploding over the past decade. Net outward investment from developing countries reached $198 billion in 2008 from around $20 billion in 2000. The 2008 figure was only 10.8 percent of global FDI, but it was just 1.4 percent in 2000.