Friday, November 4, 2016

Record profit for Stabrbucks; Oil falls as Saudi, Iran squabble; Without China, world would be in recession

1 Record profit for Starbucks (BBC) Starbucks may be complaining of "global headwinds" but that did not stop the world's biggest coffee chain from reporting record annual profits. It made an operating income of almost $4.2bn for the year to 2 October, up 16% on the previous year.

That was mainly down to a strong showing for its biggest market, the Americas, where net sales rose 11%. The fastest growth was in the China and Asia Pacific region, which recorded growth of 23% for the year. Starbucks boss Howard Schultz said its Chinese stores were the most efficient and lucrative.

While Starbucks still makes most of its profit in the US, Mr Schultz has said expansion in China will secure its future for "decades to come". Last month, Starbucks announced plans to more than double its stores in China to 5,000 by 2021.

Mr Schultz, who has been warning of a "seismic shift in consumer traffic" for years, said the popularity of online shopping was keeping people at home and away from main shopping streets or malls. Starbucks operates 25,085 stores in 75 countries worldwide, with 690 new ones having opened in the last quarter.

2 Oil falls as Saudi, Iran squabble (Rob Davies in The Guardian) Squabbling between Saudi Arabia and Iran has sent the oil price down, as tension between the near neighbours threatened to derail talks aimed at cutting production by the Opec group of oil-producing countries.

Riyadh is reportedly threatening to turn the screw on Tehran before this month’s crunch Opec meeting by increasing its own output to push prices even lower. Saudi Arabia produces up to 10.7m barrels per day (bpd), but Opec sources said it had threatened to open the taps much further.

The cost of a barrel of Brent crude dropped to $45.02 before recovering to $45.42, down 2%, after Opec’s secretary general, Mohammed Barkindo, denied Saudi Arabia had made any threats. Reports of a row come with Opec countries due to meet on 30 November to discuss curbing supply to boost prices, as they wrestle with a global oil glut.

Saudi Arabia, which has previously flooded the markets with cheap crude in a failed attempt to kill off the US shale gas boom, can afford to play chicken with Iran over prices. This is because Iran’s cost of production is higher, meaning it earns less per barrel, and it is still ramping up output after economic sanctions against it were lifted this year.

3 Without China, world would be in recession (Stephen S Roach in Gulf News) Without China, the world economy would already be in recession. China’s growth rate this year appears set to hit 6.7 per cent — considerably higher than most forecasters have been expecting. According to the International Monetary Fund the Chinese economy accounts for 17.3 per cent of world GDP (measured on a purchasing-power-parity basis).

A 6.7 per cent increase in Chinese real GDP thus translates into about 1.2 percentage points of world growth. Absent China, that contribution would need to be subtracted from the IMF’s downwardly revised 3.1 per cent estimate for world GDP growth in 2016, dragging it down to 1.9 per cent — well below the 2.5 per cent threshold commonly associated with global recessions.

Of course, that’s just the direct effect of a world without China. Then there are cross-border linkages with other major economies. The so-called resource economies — namely, Australia, New Zealand, Canada, Russia, and Brazil — would be hit especially hard. As a resource-intensive growth juggernaut, China has transformed these economies, which collectively account for nearly 9 per cent of world GDP.

While all of them argue that they have diversified economic structures that are not overly dependent on Chinese commodity demand, currency markets say otherwise: whenever China’s growth expectations are revised — upward or downward — their exchange rates move in tandem.

The US is also a case in point. China is America’s third-largest and most rapidly growing export market. In a China-implosion scenario, that export demand would all but dry up — knocking approximately 0.2-0.3 percentage points off already subpar US economic growth of around 1.6 per cent in 2016.

Interestingly, in its just-released October update of the World Economic Outlook, the IMF devotes an entire chapter to what it calls a China spillover analysis. The IMF research suggests that China’s global spillovers would add about another 25 per cent to the direct effects of China’s growth shortfall.

That means that if Chinese economic growth vanished into thin air, the sum of the direct effects (1.2 percentage points of global growth) and indirect spillovers (roughly another 0.3 percentage points) would essentially halve the current baseline estimate of 2016 global growth, from 3.1 per cent to 1.6 per cent.

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