Weekly economic briefing: Sanctions fuelling oil price rises… and petrol pump pain

The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

In this week’s blog:

Australian economic briefing
UK economic briefing
International economic briefing

Australian economic briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

Sanctions fuelling oil price rises… and petrol pump pain

Oil prices have hit their highest levels since 2014, as global production responds to geopolitical impasse and bottlenecks. Brent crude recently topped US$80 a barrel, having risen steadily over the last two months, and adding over US$20 a barrel since January this year.

The surge in prices has largely been fuelled by major oil producers Saudi Arabia and Russia rejecting pushes to increase production, as buyers of Iranian crude –affected by the imminent re-imposition of US sanctions on Iran – look to other sellers. According to the Institute of International Finance, overall exports from Iran have dropped from 2.8 million barrels per day (bpd) in April to 2 million bpd in September.

The re-imposition of Iran sanctions comes as the global oil market is already tightening: a bitter civil war in Yemen since 2015 has greatly hindered production in that country, while the crippling economic crisis in Venezuela has similarly seen production stall there. In addition, insufficient transport infrastructure in the US has hindered its ability to quickly get its oil to market.

At the same time that oil prices are on the up, the US dollar is also rising, and this is further compounding the oil price rise in $A terms. Since January this year, our dollar has fallen from above US$0.80 to as low as US$0.71, driven by a strong US economy and rising US interest rates. That’s been enough to contribute close to 40% of the total crude price increases in $A terms this year (see chart 1).

Chart 1: Contribution to Brent crude price rises ($A)
Source: Reserve Bank of Australia, Federal Reserve Bank of St. Louis, Deloitte Access Economics

These higher oil prices are translating into pain at the pump for motorists. Through the June quarter, the ACCC found petrol prices averaged about $1.45 a litre in Sydney, Melbourne, Brisbane, Adelaide and Perth – a four-year high in real terms. In fact, auto fuel has risen 7.9% over the last two quarters (to June 2018), according to the ABS. This is well above the 0.8% across the wider economy and accounts for the most significant price rise across the CPI categories. Based on previous experience, this will see consumers scale back some spending in other areas, which would be bad news for already struggling retailers.

There is, however, a silver lining. Australia is a net energy exporter, and along with higher oil prices, we’re also seeing elevated LNG and coal prices globally. Over time, this should lead to higher Federal government tax revenues, boosting the budget bottom line and giving Canberra a little more room for spending or tax cuts.

For more information on the Australian brief, please contact co-authors David Rumbens and Harry Murphy Cruise.

UK economic briefing by Ian Stewart

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to and view previous Monday Briefings at: http://blogs.deloitte.co.uk/mondaybriefing/

Brexit worries dominate latest CFO Survey

  • The third quarter Deloitte survey of UK Chief Financial Officers released today shows concerns about Brexit weighing heavily on business sentiment.
  • CFOs rate Brexit as being by far the biggest threat to business over the next 12 months, ahead of weak UK demand, trade wars and geopolitics, in the league table of CFO concerns. Indeed, CFOs are more negative about the effects of Brexit today than at any time since the EU referendum.
  • CFOs have become more pessimistic about the long-term effect of the UK’s departure from the EU. 79% expect Brexit to lead to a deterioration in the business environment, up from 60% a year earlier. 6% of CFOs anticipate that Brexit will result in an improvement in the business climate compared with 14% a year ago.
  • Meanwhile CFO confidence has fallen to the lowest level in two years, although above the record, and short-lived, low seen in the aftermath of the Brexit referendum.
  • Large corporates are pulling in their horns, with just 12% of CFOs saying now is good time to take risk. CFOs say Britain’s departure from the EU is likely to act as a drag on their spending decisions. 44% of respondents expect their own capital spending to be lower over the next three years as a result of Brexit; half expect hiring to be lower.
  • CFOs have become much more defensive in the way they run their balance sheets, continuing a trend underway since early 2017. Cost reduction is the top corporate priority and CFOs are more focussed on reducing costs than at any time in the last eight years.
  • The paradox is that this quarter’s survey took place in the wake of a modest rebound in UK economic activity in the second quarter. After a run of weak activity data earlier in the year UK data have been coming in stronger than market expectations in recent months. In August the Bank of England’s Monetary Policy Committee felt sufficiently emboldened by the momentum of growth to raise UK interest rates.
  • Brexit is drowning out better news on growth. With CFOs having to contemplate the risk of a no deal exit from the EU Brexit is the only game in town for now. If the UK and the EU strike a deal and agree a smooth transition, there could be scope for a relief rally in sentiment. The reverse, of course, also holds.
  • To read the full report and download the survey data please click on the link below:
    https://www2.deloitte.com/uk/en/pages/finance/articles/deloitte-cfo-survey.html

OUR REVIEW OF LAST WEEK’S NEWS

The FTSE 100 ended the week down 2.3% at 7,338. Global equity markets sold off and sovereign bond yields rose as investors worried that strong US economic data would accelerate the pace of US monetary tightening.

International economic briefing by Ian Stewart

Economics and business

  • UK prime minister, Theresa May, suggested the era of austerity would end in 2019 once Brexit had been implemented
  • Italy’s minister of economy and finances said it will begin reducing its budget deficit from 2020 after the EU criticised its plans to increase spending
  • Canada agreed to join the US and Mexico in a revamped trilateral trade agreement, ending months of tension on the future of NAFTA
  • Mercedes Benz and Nissan announced they plan to invest more in the US to comply with new trade rules
  • Euro area unemployment fell 8.1%, the lowest rate since 2008
  • The US unemployment rate fell to 3.7% in September, its lowest level since 1969
  • The yield on US ten-year treasury bills rose sharply to 3.18%, its highest level since 2011 as strong jobs data raised inflation expectations
  • A Wall Street Journal survey of business economists found that 58% of them think that the next US recession will begin in 2020
  • Japan prime minister, Shinzō Abe, said the UK would be welcomed into the Trans-Pacific Partnership trade deal “with open arms”
  • Chinese direct investment into the US in the first nine months of this year was less than half the level seen in the same period last year, according to Mergermarket
  • Turkish inflation accelerated to 24.5% in September, the highest rate in 15 years
  • Manufacturing activity in Turkey fell to a nine-year low in September
  • Home ownership among people in their 20s has fallen ten percentage points in less than a decade
  • More than half of 22 to 29 year-olds in the UK have no savings
  • The FT reported that London’s ultra-wealthy are moving assets off shore and some are preparing to leave in response to concerns over a Labour government led by Jeremy Corbyn increase

Brexit and European politics

  • The UK government is reportedly working on a “hybrid backstop” proposal for the Irish border involving regulatory checks between Northern Ireland and the rest of the UK
  • The FT reports that Ireland would back the “hybrid backstop” plan for an all-UK customs union with the EU
  • The Guardian reports that EU spending promises and pension costs increased by tens of billions of euros last year, which could inflate the UK’s £39 billion Brexit financial settlement
  • A no-deal Brexit could threaten the UK’s ability to access new medicines, according to the UK drugs regulator
  • Unilever scrapped its plans to move its corporate headquarters from London to Rotterdam following dissent from several major shareholders
  • Theresa May said that the post-Brexit immigration regime will focus on high-skilled workers and that EU citizens will no longer enjoy preferential status

And finally…

  • A Banksy painting, Girl With Red Balloon, self-destructed moments after being sold for more than one million pounds at Sotheby’s auction house. Art experts have said that image could be worth up to twice as much in its shredded state due to the attention surrounding the stunt – laughing all the way to the Bank(sy)

Want to stay up-to-date?

Stay on trend and in the know when you sign up for our latest content

Subscribe