Monday, December 28, 2015

Oil price fall swells Saudi Arabia deficit; 'Global economy will live dangerously in 2016'; Japan recovery takes a hit

1 Oil price fall swells Saudi Arabia deficit (BBC) Saudi Arabia's budget deficit soared to $98bn this year as the world's biggest oil exporter counted the cost of falling crude prices. In the first budget under King Salman, the kingdom said revenues reached 608bn riyals ($162bn), down 15% on official expectations. Spending for the year hit 975bn riyals, some 13% more than forecast.

To help make up the shortfall, the country's finance ministry said it would cut subsidies for fuel. Petrol prices could in some cases increase by as much as 50%, authorities said, although they will remain low by international standards. Diesel, electricity and water prices will also increase.

Oil prices have plunged from a five-year high of $125 a barrel in March 2012 to just $37.18 now. Saudi Arabia said that oil revenues, which make up 77% of the total revenue figure for 2015, are down 23% compared to last year.

It is the largest member of the Opec oil-producing cartel and has refused to cut output in order to raise prices in an attempt to put other producers - mainly US shale oil companies - out of business. Saudi thinks it can withstand low oil prices for longer than US producers, many of which are small, heavily-indebted firms.

Spending on military and security projects reached 20bn riyals in 2015, following its intervention in Yemen as well as action against militant group Islamic State. The majority of the increase in overall spending was on salaries to civil and military Saudi employees.

2 ‘Global economy will live dangerously in 2016’ (Larry Elliott in The Guardian) In all honesty, the future is unknowable and anybody who says otherwise is lying. So, with that caveat, here’s what I think might happen. At some point, a recovery built on booming asset prices, weak growth in earnings and rising personal debt is going to lead to another huge financial crisis - but not in the next 12 months.

Instead, 2016 will be a year of living dangerously, papering over cracks and buying time before all the old problems resurface. Here’s why. The big story of the past month has been the collapse in oil prices. This has two beneficial effects for the global economy. It provides additional spending power for households and businesses that consume energy, and it bears down on inflation.

With no sign that the oil cartel, Opec, has the political will to agree production curbs, it is quite possible that oil prices could fall below $30 a barrel in the early months of the year. So prediction number one for next year is that both inflation and interest rates will stay lower for longer than currently anticipated. The next theme of 2016 will be China. Whereas official interest rates are zero or thereabouts in the major developed countries of the west, in China they are still above 4%. This gives the People’s Bank of China scope to cut the cost of borrowing if it wants to stimulate growth.

The risk, of course, is that China cleans up the mess caused by one collapsing bubble by inflating another, which is what Alan Greenspan did in the US in the early 2000s. Here, then, is a second prediction. China will slow in 2016 but policy easing will prevent a collapse.

Over the past six years, the eurozone has shown an unerring ability to snatch defeat from the jaws of victory. Every time the crisis has appeared to be over, something nasty has happened. In 2016, that “something” could be Greece, caught in a debt and austerity trap, it could be rudderless Spain or moribund France.

The biggest immediate risk to the global economy comes from the emerging world, especially those parts of it affected by the crash in the cost of commodities. Brazil is the country to watch out for. The economy is contracting at its fastest rate since the 1930s, inflation is above 10%, the currency has collapsed and the finance minister has just resigned.

This is a case of history threatening to repeat itself, because the buildup to the 2008 crisis began on the periphery of the global economy. So, here is my final prediction: there will be no explosion in 2016, but a fuse will be lit.

3 Japan recovery takes a hit (Khaleej Times) Japan's factory output fell for the first time in three months in November and retail sales slumped, suggesting that a clear recovery in the world's third-largest economy will be delayed until early in 2016.

While manufacturers expect to increase output in coming months, the weak data casts doubt on the Bank of Japan's view that an expected pick-up in exports and consumption will help jump-start growth and accelerate inflation toward its two per cent target.

Industrial output fell one per cent in November from the previous month, more than a median market forecast for a 0.6 per cent decline, data by the trade ministry showed. Separate data showed that retail sales fell one per cent in November from a year earlier, more than a median forecast for a 0.6 per cent drop, as warm weather hurt sales of winter clothing.

Japan's economy narrowly dodged recession in July-September and analysts expect only modest growth in the current quarter, as consumption and exports lack steam. Some analysts warn the economy may suffer a contraction in the October-December period if household spending remains weak in the country

Wary of soft growth, the government plans nearly $800 billion in record spending in the budget for the fiscal year that will begin on April 1. The BoJ has signalled readiness to expand stimulus if risks threaten Japan's recovery prospects. The central bank fine-tuned its stimulus programme on December 18 to ensure it can keep up or even accelerate its money-printing.

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