Global Economic Recovery and Oil Markets

  • 25 January 2014

There are high hopes that the year 2014 would bring the global financial crisis and its aftermath to a close. The International Monetary Fund’s (IMF) World Economic Outlook (WEO) has projected global growth to be slightly higher in 2014, at around 3.7 percent, rising to 3.9 percent in 2015. The World Bank has predicted that global economy will witness enhanced growth during the current year, driven by accelerated growth in developing countries and high-income developed economies.

This growing confidence in the economic performance after five years of global financial crisis, which negatively affected all spheres of the economy, carries a positive message that is of great importance. The reality of this recovery can be understood from the fact that this is the first time in nearly two years when two international financial institutions, the IMF and World Bank, have raised their expectations for global economic growth. This may mark the beginning of a new phase in the global economic recovery.

These projections are also likely to have a positive impact on the global commodities market, primarily the oil markets. In its recently released outlook on global oil demand, the International Energy Agency (IEA) projected that the demand growth during the current year would be faster than previously expected. The IEA expects an increased demand of around 1.3 million barrels, which is about 50,000 barrels higher than its previous projection.

These developments can lead to optimism over the future of global oil markets, which have in recent times been vulnerable due to uncertainty over the reality and future of oil demand. This uncertainty usually prompted oil-producing countries, led by OPEC member countries, to maintain levels of oil production and not increasing them. In some cases, they even had to reduce their levels of production in order to ensure stability of oil prices and markets in general.

Despite this new found optimism, concerns remain over the performance of global economy in the future. The IMF has warned that developed countries continue to grow at less than full capacity. It has also warned against the risk of deflation, which may lead to several risks that may affect global economic recovery in the long term. The World Bank has also warned that the optimistic outlook remains vulnerable to potential setbacks in 2014 due to the potential increase in global interest rates and volatility in flow of capital across borders.

It is clear that the global economic outlook has improved compared to recent times and this is likely to continue. However, the recovery continues to remain fragile and there are still risks attached to it. It is hence important for policymakers around the world to not become over-optimistic about this recovery and deal with it carefully and cautiously. It also calls for strategic commodity producing countries, chiefly oil, to remain patient and careful when developing and implementing their production policies for the future.