Wednesday, December 23, 2015
UK growth forecast cut; Security, economy top priorities for Saudi Arabia in 2016; Oil fall and income redistribution
1 UK growth forecast cut (Larry Elliott in The Guardian) George Osborne has received a second pre-Christmas setback after official figures showing a stuttering performance by the economy in the months following the general election put the government’s 2015 growth forecast at risk.
Following much worse than expected borrowing figures on Tuesday, the Office for National Statistics pared back its estimate for gross domestic product in the third quarter of the year - and said activity had also been weaker in the previous three months.
The ONS originally said growth in the three months to September was 0.5%, but said new data showing a sharper slowdown in the UK’s dominant service sector had resulted in the estimate being cut to 0.4%. With growth in the second quarter also revised down – from 0.7% to 0.5% – the annual rise in GDP in the year to the end of September has been trimmed from 2.3% to 2.1%.
News of the GDP slowdown followed Tuesday’s ONS figures, which cast doubt on whether the chancellor would be able to meet his deficit-reduction target for the 2015-16 financial year. The government borrowed 10% more in November 2015 than it did in the same month of 2014 and in the first eight months of the year borrowed almost £67bn, only £2bn less than the forecast for the year as a whole.
2 Security, economy top priorities for Saudi Arabia in 2016 (San Francisco Chronicle) Saudi Arabia's monarch has said that security and economic development remain the country's top priorities for the coming year as low oil prices keep decreasing the kingdom's revenue.
In a two-minute speech, King Salman outlined his domestic and foreign policies, which he said are aimed at serving Arab and Islamic causes as well as fighting terrorism. Since assuming the throne in January after the death of his half-brother King Abdullah, former defense minister Salman has made security his foremost concern.
Two months into Salman's reign, he launched an offensive into Yemen against Iranian-backed Shiite rebels, known as Houthis, who had overrun the capital and other cities in the country, forcing the president and the internationally-recognized government to flee for several months to Saudi Arabia.
In April, he set a new course for the monarchy's future, recasting the line of succession and naming his nephew, Interior Minister Mohammed bin Nayef, as his successor. His 30-year-old son, Mohammed bin Salman, was appointed defense minister and second-in-line to the throne.
Efforts to diversify the kingdom's economy took on greater urgency as the price of oil — the backbone of Saudi economy — fell by around half since mid-2014. The king stressed the importance of continued investments in health care, education, housing, employment and transportation.
Salman also said the country is committed to diversifying the kingdom's sources of income and decreasing its dependence on oil. The 2016 budget is expected to be announced next week, with investors eyeing closely to see if cuts are made and to which sectors. The International Monetary Fund estimates that Saudi Arabia will post a budget deficit of more than 20 percent of gross domestic product this year, or amounting to anywhere between $100 billion to $150 billion.
3 Oil fall and income redistribution (Andrew Walker on BBC) The fall in oil prices in the last 18 months is a large-scale international redistribution of income, from sellers to buyers. We have looked at the impact on some of the losers, the oil exporters. But what about the winners i.e. the oil importers?
A fall in the oil price is often seen as similar in its effects to a tax cut for consumers. It means they have more to spend on other goods and services, some of which will be produced by businesses in the same country. It also reduces costs for businesses that use oil products - which means any that have goods to transport, plus the petrochemical industry which makes plastics, fertilisers, synthetic fabrics and much more using raw material made from refined oil.
It also helps any that spend a lot on the goods and services produced by these industries - farmers, for example. Take the eurozone. In the two years before the big price fall the region's economy contracted. Last year it grew and is doing so again this year, though admittedly not robustly. The fall in the oil price is not the only factor, but it surely helped.
There's another benefit from cheaper oil. Many countries subsidise fuel. The International Energy Agency estimates that in 2014 global subsidies for fossil fuels were worth almost $500bn. Of that, some $267bn went on fuels made from oil. Cheaper oil means that governments can cut subsidies while consumers pay unchanged prices.
That's the upside. But even for net oil importers there's a downside. Take the US. It is a net importer but the beneficial impact is not quite as pronounced as it would have been a decade ago. The reason: the rise of shale oil. It means that US dependence on foreign oil has declined markedly. In 2005 the US met 35% of its own crude oil needs. Last year the figure was 61%. The rise of shale oil means there is a larger chunk of the American economy that is vulnerable to the effects of cheaper oil.
As long as it's just energy prices that are falling, it's not a major problem. But central bankers are wary of what they call second round effects - if prices and pay agreements start to reflect an expectation that inflation is going to be very low or even below zero. That can lead to a damaging spiral of falling prices or deflation.
For the most part then cheaper oil is a benefit in most countries. But some - the oil exporters - are exceptions to that rule. And for the rest there can be some less appealing side effects that warrant careful scrutiny.