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Feature Article

OPEC Monthly Oil Market Report – August 2017

iii

Feature Article

World Economic Prospects

World economic

growth has gained momentum and its dynamic is reflecting general improvements across the

globe. Global growth is forecast at 3.4% for both 2017 and 2018, compared to 3.0% in 2016 (

Graph 1

). After

increasing by only 1.7% in 2016, OECD GDP growth has improved and is expected at 2.0% in both 2017 and

2018. The major emerging economies are also either holding up well at a high growth rate (India), performing

better than expected (China) or are recovering from recession (Russia and Brazil). With the ongoing growth

momentum and an expected continued dynamic in 2H17, there is still some room to the upside. At the same

time, challenges remain and are mainly related to global political developments and upcoming monetary policy

decisions in the US and the Euro-zone. Moreover, continuing stability in the oil market remains a key-determinant

for global growth.

Graph 1: World economic growth in 2017 and 2018

Graph 2: OECD commercial stocks,

difference to 5-year average

In the

OECD

, the US economy is rebounding from relatively low growth in 2016 of only 1.5%. A renewed

increase in investments in the energy sector along with rising domestic consumption and improving exports are

leading growth to 2.1% in 2017 and 2.2% in 2018. Planned tax-reforms could lead to higher growth, but as

political uncertainties remain, downside risk is equally pronounced. In the Euro-zone, growth has been relatively

stable over the past quarters and better than expected. GDP growth is now forecast at 2.0% for 2017 and 1.8%

for 2018, following 1.7% growth in 2016. Supported by the ECB’s ongoing accommodative monetary policy and

having overcome some political uncertainty, growth in the Euro-zone still has room to the upside, considering the

expected improvement in the labor market given the need to address the high unemployment rate. Japan is

expected to show higher growth of 1.4% in 2017, compared to 1.0% last year, and growth in 2018 is forecast at

1.1%. Structural reforms and ongoing monetary stimulus together with fiscal support all provide the basis for a

gradually improving economy, while the upside is considered to be limited.

In the

emerging markets

, China experienced better-than-expected growth in the first half of 2017, supported by

an ongoing buoyant property market. This will result in growth of 6.7% in 2017, the same level as in 2016.

However, risks from rising debt and overcapacity remain. Hence, growth in 2018 is forecast at a slightly lower

rate of 6.3%. India is holding up at a high growth level and, while the economy has to digest some of the

consequences of economic structural reforms – such as the introduction of the Goods and Services Tax (GST) –

growth is still forecast at a considerable level of 7.0% for 2017, below last year’s growth of 7.9%. Growth in 2018

is forecast to rebound to 7.5%. Meanwhile, Brazil and Russia are forecast to rebound from a two-year’s recession

to growth of 0.5% and 1.2% in 2017, respectively, supported by recovering commodity prices and an improving

domestic consumer base. Uncertainties with regards to both economies remain significant, from the domestic

political challenges in the case of Brazil and from both multilateral and more recent unilateral sanctions in the

case of Russia. These developments may impact 2018 growth, which is now forecast at 1.5% for Brazil and 1.4%

in the case of Russia.

A gradual normalization of

monetary policies

in the major OECD economies is still the most likely scenario,

given that inflation remains relatively low. However, the recent rise in the value of the euro to the US dollar has

reflected some uncertainty about future monetary policies. While the ECB may normalize its monetary policies

quicker than anticipated, the US Fed is likely to slow-down the pace of its monetary tightening. Such monetary

policies remain influential to the oil market. Capital flows have been an important source funding economic

activity in the emerging economies, supporting oil demand. On the supply side, low interest rates have been an

important driver of investments for unconventional resources, mainly in the US. The low cost of holding

inventories has also somewhat slowed the drawdown in excess oil stocks, although OECD inventories have still

seen an 87 mb decline since January 2017 compared to the five-year average (

Graph 2

).

All in all, the improvement in economic activities in 2H17

bring the expectation that not only OECD countries but

also emerging as well as developing countries more broadly will be better off by the end of the year. Moreover,

some recent positive geopolitical developments give hope that reduced tensions in some regions can add to oil

demand growth and support developments in these economies. Taken together, this will allow the global

economy to enter the coming year with a firm basis to support better-than-projected growth in 2018.

1.4

1.5

7.5

6.3

1.1

1.8

2.2

3.4

1.2

0.5

7.0

6.7

1.4

2.0

2.1

3.4

0

2

4

6

8

Russia

Brazil

India

China

Japan

Euro-zone

US

Globe

2017*

2018*

* Forecast.

Source: OPEC Secretariat.

Percent

339

274

252

200

225

250

275

300

325

350

Jan 17

May 17 Jun 17

mb

Source: OPEC Secretariat.

∆ Jun 17 - Jan 17

87 mb