Comment: Oil on troubled water?

Comment: Oil on troubled water?

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Europe, the economy of China and oil appear set to shape the outlook for this year. Ian Taylor peers at the early portents

Deducing much about the 12 months ahead from the first working day of the year would be foolish. But the business news headlines on Monday certainly encapsulated some principal areas of concern for travel.

The Financial Times front page declared: “Remaining in EU vital for UK’s future prosperity.”

It reported a survey of 100-plus economists which found “an overwhelming majority” of the view that a British exit (Brexit) would damage the economy.

None thought quitting the EU would enhance Britain’s economic prospects and 67% forecast a post-Brexit deterioration.

Willem Buiter, chief economist at investment bank Citi, went so far as to suggest a “deep recession and financial crisis” would be an inevitable outcome.

Among the minority who foreswore a gloomy prognosis following a vote for Brexit this year, the consensus was it would depress the outlook for 2017.

An in/out referendum could come as early as June if David Cameron obtains any kind of deal on EU reform that he can sell to a majority of Tory MPs.

Meanwhile, Europe’s open borders moved a step nearer to closing on Monday as Denmark followed Sweden in imposing temporary border controls, despite both being parties to the Schengen agreement and having had a passport union since 1958.

The controls aim to stem the flow of migrants. In Denmark’s case they apply primarily to the country’s border with Germany, but Sweden imposed ID checks on travellers arriving by train, bus or ferry from Denmark.

This could conceivably jeopardise the next series of Nordic-noir TV drama The Bridge which features the Oresund crossing between Sweden and Denmark.

What impact it might have on a UK referendum – making the case for EU reform easier or amplifying a sense that Europe is falling apart – is impossible to say.

While most of us focused on getting through a first day at work without wholly losing a holiday-induced state of mind, global stock markets reacted to “fresh concerns about China and heightened tensions in the Middle East” by dropping.

The FT reported “a wave of risk aversion crashing through world markets”.

By midday in New York the S&P 500 index was on course for its biggest one-day fall since September. The German Dax, equivalent of the FTSE, was down more than 4% by the end of the day. And in China, plunging prices triggered a new rule, suspending trading – though not before the Shanghai index dropped by 7%.

Whatever the particular cause – non-government data suggested a fresh contraction in Chinese manufacturing – the FT noted: “The overriding concern of markets this year will be the state of China’s economy.”

Data from the International Monetary Fund identifies China as the source of 35% of world economic growth over the past five years, and its economy is slowing.
This could matter more than we might hope.

In another piece yesterday on the outlook for share prices, the FT noted: “Apart from a handful of stocks that are doing very well, the US markets are in a slump.”

It reported that in 2015 US bonds and equities (shares) “had their second-worst 12 months” in 20 years – second only to the crash of 2008. Shares in four companies did very well – Facebook, Amazon, Netflix and Google.

A slightly larger group including Microsoft, Salesforce, eBay, Priceline and Starbucks, made up a ‘Nifty Nine’ according to the FT. But that was it. Columnist John Authers concluded: “Apart from the excitement generated by these companies, things were dire.”

Authers explained: “Such a narrowing of the market is a classic symptom of a lengthy rally that is coming to an end. This one has lasted almost uninterrupted since 2009.”

Markets are not the sole key to economic performance or consumer demand, of course. But one can feed into another and whatever happens in the US will have a major impact here.

The low price of oil remains a huge positive factor for the sector. However, its continuing fall could yet prove destabilising.

“All we have seen so far is the prologue,” yet another FT report suggested yesterday. “The effects of the fall in the oil price are still only beginning to work through.”

Oil production projects worth hundreds of billions of dollars have already been cancelled or postponed. But with oil trading at $30 a barrel below the industry’s break-even level for all bar the major Middle East producers, further contraction appears inevitable – primarily in the US.

At the same time, instability in the primary oil-producing region is spreading.

Not only does IS continue to cause mayhem through terror, but Saudi Arabia’s execution of a Shia cleric and the severing of ties between Iran and its Sunni neighbours this week could deepen the crisis in the region just as Iran was poised to come in from the diplomatic cold.

Who knows what the next 361 days will bring? But The Times put the prospects succinctly in its lead business headline yesterday: “Europe, China and the price of oil will be the key issues in 2016.”

The industry could need all its resilience if it’s to make the most of the year.

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