The most interesting bits of corporate news out this week came from Vodafone and De Beers. These are two very different companies – mobile phone businesses drive their growth at the bottom end of the market and diamond companies at the top end. But they both said similar things; that the growth they were seeing in emerging markets was not quite compensating them for slowing sales in the West. Vodafone announced flat revenues in the UK and falling revenues in Spain. There was still growth in emerging markets but it slowed – from 12.6% in the previous quarter to 9.2%, while revenues per customer fell in India. De Beers repeated the theme, saying that until now the fall-off in US demand has been offset by fast growth in the likes of China and India but that it expected things to be more “challenging” from now on. So much for the idea, loved by the City’s bulls, that there is no need to worry about global growth because Asia is growing fast enough to cover any fall-off in demand from the West. It turns out there is plenty of reason to worry: Asian demand can’t keep total global demand growing indefinitely – not for phones, not for diamonds and, as we seem to be learning this week, not for oil either.
The oil price is now 12% off its highs. It is nice to see a hint of rationality return to at least one market. The oil bulls remain convinced that rising demand and tight supply mean the price can go up for ever – and in a straight line too. However, not only does it mean no such thing (markets are prone to sudden changes of direction) but the bulls have failed to take into account the changing balance in the equation. This bull market started just as it should have – with rising demand in a growing global economy slamming against infrastructure-related supply constraints. But today the global economy is in hideous shape and all over the West demand for fuel is falling. Sales of oversized pick-ups and SUVs have fallen 18% in the US in the last year. Mastercard reports that petrol demand has been falling in the US for 13 weeks.
Overall, the International Energy Agency has cut its forecast of global demand growth for 2008 by almost 50% to under 1% (over the last few years it has tended to run at around 1.8%). The supply situation has shifted too. New production is kicking in and, says Niels Jensen of Absolute Return Partners, another 3 million barrels a day are forecast to be added to supply by late 2009.
So what next for oil? Long term it is reasonable to think an uptrend will resume – the US will eventually recover and Asian growth isn’t going away forever. But it is reasonable to think that this pullback will last some time. Why? Because like all commodities, the oil price is sensitive to the ups and downs of the global economy. And over the next few years there will be many more downs than ups. US consumers appear to be finally capitulating (not, I suspect, out of choice but, given their levels of debt, out of desperation). They are even cutting back on gambling. Gaming revenues in Las Vegas are down more than 4% this year. Consumer confidence surveys also consistently come in near historical lows. It seems that the US – just like the UK where retail sales fell nearly 4% in June – has reached a saturation point. It’s hard to see how matters can improve. With no saving cushions; asset prices falling; and no more scope for mortgage equity withdrawal, consumers have little choice. They can either sell assets (tricky) or they can cut back on spending. They’re also likely to start bumping up their savings soon – after all, if your house isn’t your pension you’re going to have to get a real pension somehow.
And that means that there is trouble ahead for emerging market growth. Chinese export growth is already slowing fast. In June it was just over 17% year on year, down from 28% in May and I’ll bet it falls a lot further – let’s not forget China’s chief export market is imploding (the US consumer still accounts for one-fifth of global demand). I suspect the global recession has only just begun. Lehman Brothers is forecasting oil prices to be $90 next year. I’d put my bets on seeing that long before we see $200.
• In my last column, I wrote about the great rates you can get on cash at the moment and suggested looking at the Northern Rock fixed-rate bonds (7% on the five-year bond!). Some of you are concerned that the government might remove its guarantee and it is true that it can. However three months’ notice has to be given so you’ll get plenty of time to move your money if needs be. Also reassuring is the fact that the Northern Rock website claims that “all term deposits including Fixed Rate Bonds” are covered “for the duration of their term”.
• This article was first published in the Financial Times