How changes in the political and energy landscape are reshaping the global outlook

This is a collaborative article by Michael Ryan, Sara Johnson and Antonia Bullard.

On balance, the global economy is expected to accelerate in 2017 but not without considerable risks that have the potential to disrupt world output and trade.

Global real GDP growth will strengthen in 2017-18, led by better performance in the United States and emerging markets. A few economic factors are expected:

• The US economy will benefit from an improving tax and regulatory climate
• The Eurozone and Japan will continue along slow growth paths
• UK growth will slow as difficult Brexit negotiations lead to investor and consumer caution
• China's growth will be restrained by imbalances in credit, housing, and industrial markets
• Asia will remain the world's dominant driver of growth through trade liberalization, more open FDI, rising consumer spending, and continued urbanization
• Russia and Brazil will begin to slowly recover under a more favorable commodity price environment
• Risks include trade conflicts, further instability in the Middle East and Africa, terrorism, and North Korea
• We maintain a watchful eye on the prospect for healthcare and tax reform in the US, changes in relative monetary policy amongst the major central banks, amendments to NAFTA and what comes after TPP, the European election cycle, and evolving energy strategies amongst major oil and gas producing nations

Figure 1: Changes to real GDP

We can see many parallels to the macro picture in energy markets:

• Rising demand
• Higher growth in non-OECD markets
• Recoveries (modest) in commodity prices
• Excess capacity

IHS Markit forecasts global growth in total liquids demand of 1.5 million barrels/day, which together with reasonable compliance on the OPEC/non-OPEC cuts agreed in November 2016, will rebalance markets. But, North American activity is responding to higher prices and much reduced breakeven costs, and the US and Canada will lead non-OPEC back to supply growth. We expect the net impact will keep oil prices in USD 50-60/bbl band.

The fast reactivity of US and Canadian supply, together with growth from long-term projects coming on stream in Brazil, Russia, Kazakhstan, and elsewhere, point to oversupply conditions returning in 2018. OPEC countries face the dilemma that they do not want to lose market share, but their fiscal accounts and balance of payments economies cannot long sustain oil prices below $60. At the May 2017 meeting, OPEC is therefore likely to kick the can down the road by agreeing to continue market management in some form.

With tighter inventories and higher demand, we note a turning point in capital spending. Equipment and service providers are set to recover some of lost pricing power after becoming price takers following the oil crash.

For additional insights into the global macro outlook and energy market dynamics, view an on-demand webcast.

Michael Ryan is Principal Economist of World Industry at IHS Markit.
Sara Johnson is Senior Director of Global Economics at IHS Markit.
Antonia Bullard is Vice President of Energy at IHS Markit.

Posted 11 May 2017

Ms. Sara Johnson is Senior Research Director of Global Economics at Economics & Country Risk business unit. In this role, she helps clients assess worldwide business and financial opportunities and risks. Ms. Johnson co-authors the Global Executive Summary, manages the Executive Strategy Council, and presents the IHS economic outlook to international conferences. She previously served as North American Research Director and Chief Regional Economist with Standard & Poor's DRI, and Managing Director of Global Macroeconomics with Global Insight, predecessors of IHS Economics & Country Risk. Ms. Johnson is a former Director of the National Association for Business Economics and the NABE Foundation and was named a NABE Fellow in 2014. Ms. Johnson holds a Bachelor of Arts in Economics and Mathematics from Wellesley College, Wellesley, Mass., US, and an Master of Arts in Economics from Harvard University, Cambridge, Mass., US, with concentrations in Finance and Macroeconomic Theory.

Antonia Bullard, Vice President at Energy, leads our Energy-Wide Perspectives research, including global energy scenarios, climate and carbon, and integrated energy research for the oilfield services, equipment, and industrial markets. She advises clients on long term trends, energy transitions, corporate strategy, government and investor communications, and other key issues. She also advises clients in the Russian Federation on a range of upstream, downstream, and corporate topics. She holds an MA from Oxford University (United Kingdom) and was a Kennedy Memorial Scholar at the Massachusetts Institute of Technology. She speaks English, Russian, and German.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.