Economic Headwinds
Jan. 20, 2023
Against a backdrop containing various forms of geopolitical risk in 2023, one major concern for both consumers and business operators will be the health of the global economy. Price pressures have eased at the end of 2022 as central banks worldwide have fought high inflation while the global economy continues to grapple with the possibility of recession. Officials in the US, the world’s largest economy, have increased rates at the fastest pace since the 1980’s to cool the economy and bring down inflation, which is running near a 40-year high. High inflation, elevated energy prices, and rising borrowing costs have tested economies around the world during the rebound from Covid-19. Recession looms as a major risk for economies while governments look to stifle inflation, an after effect of the pandemic that has since been inflamed by higher energy prices. We will be closely monitoring economic releases including the forthcoming IMF World Economic Outlook. In the event the US recession were milder than in Europe and other developing countries, we would expect the dollar to maintain its relative strength. This would in turn put pressure on food and commodity prices. Continued dollar strength could pressure oil prices higher and cause tanker newbuild prices to be comparatively more expensive for non-US buyers. Both factors would be bearish for tanker markets.
As we progress through 2023 the two big questions will be how much further central banks will raise their key interest rates to tame inflation and how China’s economy will perform as Covid-19 policies are relaxed. Slowing global demand has manifested itself as an issue in Asia, as industrial powerhouse countries report falling export levels. If China’s economy is revived in 2023, its demand for oil and gas will surge, further squeezing global markets. Our base case is that the re-opening will be a protracted process as the country will continue to experience an “exit wave” of Covid infections and a slower than expected recovery in the property sector, and a worse-than-expected slowdown in external demand.
One additional risk has emerged this week for the global economy with the US government reaching its debt ceiling limit of US $31.4 trillion. The US Treasury Department began “extraordinary measures” to keep paying the government’s bills on Thursday. These accounting maneuvers, which include suspending investments for certain government accounts, will allow the Treasury to keep paying obligations to bondholders, Social Security recipients, and others until at least early June.
A failure by the US to make payments on time could have far-reaching economic and financial consequences. US sovereign debt underpins much of the global financial system, and the yield on the 10-year Treasury is a benchmark interest rate throughout the economy. A default would cause a loss of investor faith in the US to pay off its debts and could spur and selloff in Treasurys that could cause chaos in financial markets, lift interest rates and cause borrowing costs to rise. This will have the impact of adding potential market volatility into a backdrop that already contains a large amount of potential geopolitical instability as we progress through the year.
We will have more in-depth coverage for the global economic outlook in our 2023 Tanker Market Outlook to be released at the end of January.
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