Since 1975
  • facebook
  • twitter

Despite India, seat belt sign is on for global economy ‘take-off’

US President Joe Biden disembarks from Air Force One with first lady Jill Biden as he arrives in Georgia to promote plans to rebuild the US economy on April 29, 2021. (REUTERS)
US President Joe Biden disembarks from Air Force One with first lady Jill Biden as he arrives in Georgia to promote plans to rebuild the US economy on April 29, 2021. (REUTERS)
Short Url:
30 Apr 2021 12:04:29 GMT9
30 Apr 2021 12:04:29 GMT9

The US economy is “ready for take-off,” American President Joe Biden said in his first speech to Congress; news the rest of the world has been waiting to hear for a long time.

Biden believes that America has put the worst of the coronavirus disease (COVID-19) pandemic behind it, and the stimulus-gorged economy is on the verge of dramatic growth for the rest of this year.

His comments were given added weight, and global investors given even more cause for optimism, by almost simultaneous statements from the chairman of the US Federal Reserve, Jay Powell, that the Fed would continue the massive program of financial asset purchases that have kept the American economy and markets buoyant during the pandemic recession.

Of equal reassurance to the global investment community were the strong results last week from the high-flying technology companies that have been the backbone of US stock markets, but which some experts were predicting must come crashing back to earth.

Against such a positive macro-economic background in the US, surely there is no chance now of a tech-led market crash that some have feared for the past year?

If the US economy is racing its engines on the runway, the other great driver of global economic wellbeing, China, is already soaring away into the clouds. Chinese gross domestic product (GDP) grew by 18.3 percent in the first quarter, an all-time record, as the world’s biggest manufacturer dramatically reversed the pandemic slowdown of last year.

The US and China between them account for 40 percent of global economic activity, while India’s contribution is in the low single digits. What is a humanitarian tragedy for India (and, you might add, Brazil) is not necessarily an economic disaster for the rest of the world.

Frank Kane

In this overall picture of optimism, the dark cloud has been India. The tragic resurgence of the COVID-19 virus there is bound to affect growth in the world’s fifth biggest economy and is a disaster on a human level.

But it is important to keep a sense of economic perspective. The US and China between them account for 40 percent of global economic activity, while India’s contribution is in the low single digits. What is a humanitarian tragedy for India (and, you might add, Brazil) is not necessarily an economic disaster for the rest of the world.

It does, however, complicate the calculations of oil producers such as Saudi Arabia and the other Gulf countries. India is a big importer of oil, which is why the OPEC+ meeting earlier this week deliberated about whether to stick to scheduled increases in production.

In the end, they went ahead with plans to add around 800,000 barrels per day (bpd) back to world supply, obviously taking the view that the US/China recoveries outweighed the risks from India, Brazil, and some other parts of the world, including Europe.

The oil price since then has suggested they were right to take that calculated gamble, with Brent crude nudging upwards ever since and now sitting close to $67 a barrel, well in touch of the “goldilocks” range most OPEC+ producers regard as the global sweet spot. In fact, the current big debate in the oil business is about just how far up the Brent price can go.

Two of the most bullish analysts on oil prices – US investment banks JP Morgan and Goldman Sachs – have just in effect doubled down on their predictions earlier this year that the world was on the verge of a “supercycle” of oil and other commodity prices as economic recovery squeezed supply that had been starved of investment during last year’s price collapse.

“We believe the industry’s great capital reset post pandemic has only served to accentuate our supercycle thesis,” said Christyan Malek of JP Morgan, while Goldman Sachs reiterated its target of $80 a barrel in the next six months.

These bullish predictions are not shared by everyone in the industry, nor are they necessarily welcomed by OPEC+ participants with a watchful eye on a possible come-back by US shale.

But the fact that the debate now centers on how far the oil price can go shows that the world, led by the US and China, thinks it is beating the COVID-19 pandemic, and is looking forward to the lift-off to come in the second half of the year. Seat belts, please.

• Frank Kane is an award-winning business journalist based in Dubai. Twitter: @frankkanedubai

Most Popular
Recommended

return to top