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As is often the case with the energy sector, crude oil has been at the forefront of the news of late. For the last few years the story has centered on the global crude oil price plunge that started back in mid-2014, eventually bottoming out in January of 2016, falling to the lowest level in over a decade. Uncertainty over the health of the global economy as well as the feared economic slowdown in China that began in mid-2015, led to a decline in global demand and consumption of oil. Oil producers continued output desperately trying to gain precious market share from others in the sector, even as prices continued to fall. An agreement to freeze production between major oil producers, speaheaded by Saudi Arabia and Russia, finally came to frution in late November of 2016, which caused oil prices to rally at the end of 2016 into 2017.
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Prices were sent skyrocketing after the deal announcement was made and prices gradually increased throughout 2017, as members of the deal cut production in addition to a little help from increased political tensions in the MENA region during the year. The deal was later extended through December 2018 with oil prices steadily increasing.
That OPEC members have proved compliant has surprised the markets, which had initially doubted they would adhere to the cuts. A substantial volume of oil has been taken off the market, however, the drop in global inventories has been slow, given rising U.S. stocks. The international agreement to cut crude output has reinvigorated rivals in the U.S. shale industry, which has undermined the efforts of Saudi Arabia and Russia. Indeed, some analysts have speculated that deal may be abandoned before December 2018, especially as internal conflicts between Saudi Arabia and Iran ramp up once again.
FocusEconomics analysts expect Brent crude oil prices to average USD 63.1 per barrel in Q4 2018 and WTI crude oil prices to average USD 59.6 per barrel in Q4 2018.
So, with all of the above said, how are the top oil producing country’s economies expected to perform this year amid all this news surrounding oil? Let’s take a look…
United States
The economy looks poised to have recorded its best performance in over three years in the second quarter, fueled notably by recent tax cuts and strong consumer dynamics. However, growth may have reached its peak, as mounting trade concerns heighten risks to the outlook. Average retail sales growth in Q2 reached a 6-year high, supported by robust consumer confidence and an improving labor market throughout the quarter—with labor participation rising in June. Meanwhile, industrial output recorded solid increases in each of the three months of the second quarter. On the other hand, survey data for June shows heightening concerns about supply-side strain, magnified by the sizeable uncertainty caused by recent escalations in trade tensions and tariff measures. This uncertainty will likely drag on growth going forward, particularly if the U.S. administration goes ahead with tariffs on USD 200 billion of additional Chinese goods, as unveiled on 10 July.
An expected increase in federal outlays resulting from the budget deal should support growth this year and the next, an effect that will be compounded by the tax rewrite approved last December. Household spending is also projected to benefit from a sturdy labor market and solid housing gains, while business investment should remain resilient on fiscal stimulus and stronger global growth. FocusEconomics panelists see GDP expanding 2.6% in 2018, which is unchanged from last month’s estimate. In 2019, growth is seen moderating to 2.2%.
Russia
Incoming data suggests that economic momentum held up in the second quarter, after GDP growth accelerated at the start of the year. Higher oil prices are buttressing the all-important energy sector, and export growth was firm in April and May. In addition, the unemployment rate remained at a multi-year low in June and retail sales growth picked up in the same month, buoyed by World Cup-related spending. On the political front, President Vladimir Putin stated on 20 July that a planned increase in the retirement age would be reviewed. The legislation had provoked widespread protests earlier in the month, although analysts argue it is necessary to combat the effects of an ageing workforce and improve the sustainability of the pension system.
Growth is expected to pick up this year, thanks to strengthening private consumption and firmer oil prices. An improving labor market and low inflation should buoy household spending, while higher commodity prices will support export growth. That said, high geopolitical uncertainty and the possibility of further economic sanctions remain key risks to the outlook. FocusEconomics Consensus Forecast panelists see GDP expanding 1.7% in 2018, which is unchanged from last month’s forecast. In 2019, growth is seen steady at 1.7%.
Read more on the Russian economy
Saudi Arabia
The economic recovery is gathering pace mostly due to OPEC’s decision to increase oil production in order to keep markets adequately supplied and high oil prices, which have stoked activity in the all-important oil sector. Moreover, the recovery is broadening as the impact of the VAT implemented in January fades, and gains from the recovery in the oil-sector are slowly trickling down to the rest of the economy. The non-hydrocarbon PMI hit a six-month high in June, while credit growth and foreign reserves improved in Q2. Higher production and oil prices are also translating into an improvement in the government’s fiscal position and the current account balance, which recorded a healthy surplus in Q1. On the flip side, the government’s Saudization policy, which is expelling foreign workers, could create labor shortages in some sectors, while the crackdown on corruption implemented last year is deterring investment and spurring capital outflows.
Rising oil production and higher prices for the black gold will fuel this year’s economic recovery. However, the VAT implementation that disrupted activity at the outset of the year, persistent regional threats and domestic political unrest will weigh on growth this year. FocusEconomics Consensus Forecast panelists expect growth of 1.7% in 2018, which is up 0.1 percentage points from last month’s projection. In 2019, growth is seen picking up pace to 2.3%.
Read more on the Saudi economy
Canada
Canada’s economy appears to have held up reasonably well through the first half of the year, despite the slowdown in consumer spending in the first quarter. Although growth in April was modest as cold weather hit retail trade, it beat expectations on solid manufacturing gains. Higher interest rates and new mortgage-lending rules continued to pinch consumers in the second quarter, although recent employment gains likely provided some upside for household spending. Meanwhile, housing metrics have begun to stabilize after falling off for much of the past year, leaving policymakers to breathe a cautious sigh of relief. Nevertheless, external headwinds are picking up; Canada-U.S. trade relations are at an all-time low, and the possibility of additional tariffs on automotive exports would bruise the external sector. Furthermore, recent posturing suggests that wrapping up NAFTA renegotiations before year-end is currently all but off the table. Despite this, exports and investment both seem largely unshaken so far.
Firm economic fundamentals are expected to support a solid outturn this year. Although household spending is seen moderating as higher interest rates squeeze indebted consumers, tight labor market dynamics should cushion wages. Oil and gas exports, as well as stronger non-residential investment, are expected to lend support. Risks to the outlook persist, however: NAFTA remains in limbo, and the housing market is still fragile. FocusEconomics analysts expect growth of 2.1% in 2018, unchanged from last month’s forecast, and 1.9% in 2019.
Read more on the Canadian economy
Iraq
Protests broke out in July after Iran decreased its energy exports to Iraq, intensifying the effects of the heat wave. Protesters also vented frustration over rising unemployment, corruption and government policies. Demonstrators blocked roads to oil fields in the south, and the prostest will likely dent the country’s growth prospects in H2. The situation is compounded by political gridlock; more than two months after general elections, a new government has yet to be formed. More positively, however, recently released data showed the economy performed fairly well in the first quarter of the year thanks to a strong oil sector, which was buoyed by increased output and higher barrel prices.
This year, the economy should benefit from higher oil prices. However, protests could significantly dent economic activity, particularly if they become more prolonged. In addition, a large fiscal deficit and a long government formation process cloud the outlook. FocusEconomics panelists expect growth of 2.4% in 2018, up 0.1 percentage points from last month’s forecast, and 3.9% in 2019.
Read more on the Iraqi economy
Iran
Tensions between Iran and the U.S. have intensified in recent weeks ahead of two waves of U.S. sanctions scheduled for August and November, adding downward pressure on growth, which already slowed sharply in SH 2017. In response, the Iranian government vowed to retaliate by imposing a blockade on Gulf oil exports if sanctions materialize. The rial has continued to plunge and hit a record low against the dollar on the unregulated market this week following a dramatic sell-off. On 25 July, President Hassan Rouhani replaced Central Bank Governor Valiollah Seif with Abdolnaser Hemmati, who will be in charge of halting the slide of the rial. Further cabinet reshuffling could follow as the government grapples with a deepening economic crisis.
Iran’s uncertain economic outlook continues to reflect looming sanctions. Moreover, growing social unrest and mounting inflationary pressures could exacerbate the economic quagmire. FocusEconomics Consensus Forecast panelists see growth at 2.7% in SH 2018, down 0.1 percentage points from last month’s estimate. In SH 2019, growth is expected to slow to 0.9%.
China
Authorities’ efforts to curb shadow banking and support financial deleveraging weighed on growth in Q2 amid rising trade tensions with the United States. On 6 July, the United States imposed tariffs on USD 34 billion worth of Chinese imports. China immediately retaliated with corresponding tariffs. On 11 July, President Trump’s administration released a list of 10% tariffs on an additional USD 200 billion of Chinese goods likely to be enforced in two months. Chinese officials stated that the country will take unspecified measures to counter this threat, which could include non-tariff barriers, as China imports only around 150 billion from the U.S. The actual impact of ongoing trade disputes with the United States will start to be seen this month, especially in manufacturing activities and logistics.
Global and domestic headwinds are expected to impact growth in H2 and beyond. The brewing full-blown trade war between China and the United States is the main downside risk to the country’s economic outlook. Domestic threats, however, including a cooling property market and financial deleveraging, are also building. FocusEconomics panelists forecast the economy will grow 6.5% in 2018, which is unchanged from last month’s forecast. In 2019, the economy is seen expanding 6.3%.
Read more on the Chinese economy
United Arab Emirates
Economic activity appears to have been robust in Q2, supported by a pick-up in oil production, recent pro-business reforms and solid activity in the non-oil sector. The PMI rose to its highest level of the year in June, while in the same month the UAE exceeded its OPEC oil production target for the first time in 2018. New policies implemented in recent months—including a visa reform in May, a joint investment plan with Saudi Arabia, a large stimulus package in Abu Dhabi, and several measures aimed at cutting red tape and increasing the ease of doing business—have also been supportive of business confidence, which hit the highest level on record in the June PMI. Moreover, while employment growth remained negligible throughout the quarter, it appears poised to increase in Q3 as backlogs of work have reached historic highs. On July 29, the Abu Dhabi government announced it would allow GCC nationals to apply for its business license scheme without requiring an office and increased the scope of eligible industries, in a bid to reduce firm set-up costs and further attract new businesses.
Growth in the non-oil economy should accelerate this year on the back of strong investment. Notably, the large infrastructure push underway as part of the country’s preparation to host the 2020 World Expo, recent business-friendly reforms and stimulus, and a new investment law to be unveiled in Q4—which will authorize complete foreign ownership of firms in select sectors—will likely buttress investor confidence and provide a large boost to FDI inflows. In addition, the country can count on the dynamism of its tourism sector, especially in Dubai. FocusEconomics panelists expect GDP to increase 2.6% in 2018, which is unchanged from last month’s forecast, and 3.2% in 2019.
Read more on the Emirati economy
Brazil
Weak economic data continues to roll in for the second quarter, confirming that the nationwide truckers’ strike derailed the recovery. Economic activity recorded the largest contraction on record in May, retail sales plunged in the same month and the manufacturing PMI fell into contractionary territory in June. However, the shock should be temporary seeing as the strike ended in early June, and leading data for after the strike has shown some improvement. In the political arena, five centrist parties declared in July that they would back center-right Brazilian Social Democracy party candidate Geraldo Alckmin in the October election, which should boost his chances. Moreover, the combination of parties supporting him will give Alckmin—who is regarded as the most market-friendly candidate—an edge against his competitors as he will consequently receive the largest TV airtime during the campaign. The latest opinion polls prior to the announcement placed him in fourth place.
Brazil’s growth forecast was chopped for a third consecutive month as the truckers’ strike, a less supportive global backdrop and higher oil prices dent the country’s outlook. FocusEconomics panelists now see the economy growing 1.7% this year, down 0.2 percentage points from last month’s forecast. A market-friendly outcome to October’s election remains critical to ensuring a sustainable recovery; however, this is far from certain. Next year, GDP is seen growing 2.5%.
Read more on the Brazilian economy
Kuwait
Economic growth likely firmed up in Q2 and the start of Q3, after Q1’s modest recovery. Following OPEC’s decision to raise oil production starting in July, Kuwait has begun to ramp up exports, as deals to increase supply of light crude oil to several Asian countries are underway. The economy continues to benefit from the oil price rally, which should improve both the fiscal and current account balances. Improved dynamics in the oil sector, however, could result in further delays in economic reforms aimed at bolstering the non-oil economy; parliament has shown reluctance to impose reforms, including the introduction of a VAT.
With the economic recovery well underway, the outlook for this year and next remains positive. Stronger domestic demand, underpinned by a pick-up in both fixed investment and private consumption, should bolster growth. Furthermore, increased oil production and higher oil prices will also propel momentum. However, diversification efforts could dissipate in the wake of a stronger oil sector and drag on the non-oil economy. FocusEconomics panelists expect growth of 2.1% in 2018, up 0.1 percentage points from last month’s forecast, and 3.0% in 2019.
Read more on the Kuwaiti economy
Venezuela
The economy remains in dire shape. According to the opposition-controlled congress, the economy contracted 12% year-on-year in the first quarter on the back of falling oil output—a reflection of years of chronic underinvestment and mismanagement in the all-important industry. In June, oil production slipped to a new multi-year low while the number of active oil rigs dropped to the lowest level in over 15 years, pointing to further declines in output. Moreover, the bolivar continued to tumble in both the official and parallel markets in July, further feeding into spiraling inflation. In late July, President Nicolás Maduro announced his first set of economic measures that seek to contain hyperinflation and stabilize the free-falling bolivar, which include a monetary reconversion and potential loosening of currency controls. The details of how these policies would be implemented, however, remain unknown.
Rampant inflation, dwindling oil production and a dysfunctional exchange rate system are expected to keep the economy in depression. Increased financial pressure from sanctions also compound the country’s woes. Furthermore, the recent government proposals are expected to be ineffective in tackling the crisis. The severity of the crisis may generate the conditions for a political transition, with the latest incident being an apparent assassination attempt on President Maduro on 4 August, and is a scenario that some of our panelists have begun factoring into their forecasts. FocusEconomics panelists see the economy contracting 11.3% in 2018, which is down 0.1 percentage points from last month’s forecast. In 2019, the panel sees GDP falling 4.1%.
Read more on the Venezuela economy
Norway
Latest indicators suggest that the economy grew at a good pace in Q2, following a weak start to the year. Retail sales in May grew at the fastest pace since December 2017 amid a tight labor market and high wage growth. Moreover, data suggests that house prices bottomed out at the beginning of 2018 and are slowly recovering, as evidenced by price increases in Q2. The recovery in house prices has been supported by low interest rates and declining unemployment. Meanwhile, exports of goods increased at the fastest pace in over a year in Q2, buttressed by higher oil prices. However, complicating the economic picture for Q2 is industrial production, which contracted for the fourth consecutive month in May.
The economy is expected to grow at a robust pace this year and next on the back of higher prices for Norwegian commodities such as oil and natural gas. The mainland economy—which excludes petroleum activities and related ocean transport—should benefit from a tight labor market and favorable credit conditions. FocusEconomics Consensus Forecast panelists expect total GDP to expand 2.1% in 2018, which is up 0.1 percentage points from last month’s forecast, and 2.0% in 2019. Mainland GDP is expected to grow 2.4% in 2018, which is up 0.1 percentage points from last month, and 2.2% in 2019.
Read more on the Norwegian economy
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