Forecasting world economic growth in 2010 has proved to be a considerable challenge. The persisting impact of the recent global recession as well as the ongoing effects of the unprecedented government-led stimulus have created a significant amount of uncertainty in forecasting GDP growth and consequently oil demand growth. This has not diminished with the release of official GDP numbers as these have frequently been subject to significant revisions.
The severity of the economic crisis and its prolonged impact on the world economy have made it necessary to maintain a more cautious approach. In August of last year, GDP growth in 2010 was projected to reach only 2.3%. Since then, this figure has been revised upwards and now stands at 3.9%. The forecasts of other institutions have experienced similarly large revisions. Over the same period, the IMF’s projection has been revised up from 1.9% last year to now stand at 4.6% (Graph 1). The main driver behind these revisions has been the stronger-than-expected impact of fiscal and monetary stimuli enacted by governments and central banks across the globe.
With data now available for the first half of the year, it appears that initial forecasts for world oil demand also underestimated the impact that the massive government stimulus would have on oil consumption. Actual data indicates a stronger rebound in demand in the first half and this has necessitated upward revisions to the forecasts for the first and second quarters. The forecast for world oil demand growth in 2010 has been revised up by 0.5 percentage points (pp) to now stand at 1.2% (Graph 2). This represents less than a third of the 1.6 pp adjustment to the GDP forecast, a difference which highlights the weakening correlation between GDP growth and oil demand, due mainly to ongoing structural changes in the economy. Among the key factors contributing to this declining relationship are the expansion of the service sector relative to manufacturing, particularly in the OECD, and the shift of global growth contributions from the developed to the developing countries.
Now that the current round of government stimuli appears to be winding down, demand growth in the second half of this year is likely to return to the initially projected growth levels, assuming that no further government support is forthcoming. As a result, oil demand could weaken over the remainder of this year. In fact, the impact of the slowing economic recovery on oil demand is already evident as growth in oil consumption is slowing down and has even turned negative in some parts of the world. This is true not only for OECD demand, but also for some non-OECD countries.
This year, the US has continued to play a major role in global oil consumption and recent weekly data shows that US oil demand growth has so far been stronger than expected. However, this has been more than offset by the ongoing contraction in European consumption and, overall, the OECD region is not expected to achieve any oil demand growth in 2010. Similarly, oil demand growth in the emerging economies, especially China, has helped to partially compensate for the lower growth in OECD demand. However, efforts by the government in China to prevent the economy from overheating could dampen oil demand growth in the coming months.
Repeated revisions to world economic growth — a key driver of oil demand — have made forecasting oil market developments in 2010 particularly difficult. This is in addition to other highly uncertain factors, such as the sectorial distribution of growth, the price of oil relative to its substitutes and weather conditions, which also impact oil consumption. As a result, the forecasts for oil demand are subject to frequent revisions. In fact, in recent years, actual demand has turned out to be lower than projected, leading to substantial downward adjustments. Taken
together, these developments underscore the need for continued caution about oil demand projections in a highly uncertain economic environment.