Grim forecast for energy demand as ‘secular stagnation’ sets in

By Nathanial Gronewold | 04/13/2015 08:15 AM EDT

Consensus is growing that the global economy is becoming mired in stagnation nearly everywhere — and that it holds major implications for future energy demand and, in turn, energy businesses worldwide.

Consensus is growing that the global economy is becoming mired in stagnation nearly everywhere — and that it holds major implications for future energy demand and, in turn, energy businesses worldwide.

Major international institutions are increasingly sounding the alarm that the world’s economy is slowing precipitously and that the slowdown appears to be driven by demand, not faltering output. The latest backer is the normally upbeat International Monetary Fund (IMF), which is publishing its new World Economic Outlook later this week.

The emerging market economies the IMF sees facing economic troubles include India, China, Brazil, Mexico, Russia and Turkey. In all, analysts predict that "potential growth is likely to decline further, as potential employment growth is expected to slow."


While Brazil and Russia’s economic prospects don’t matter as much to oil markets, slower-than-expected energy demand growth in India and China will certainly have an effect. Experts also are increasingly acknowledging that softening demand for crude oil is a great unstated factor in the crude price collapse witnessed at the end of last year.

"We’re probably near peak demand," said Foster Mellen, a strategic analyst at Ernst & Young, or EY. "Certainly growth is looking at being very minimal."

The IMF’s forecast sees slower growth in both the developed and developing world, and expresses fears that huge government debt loads in advanced economies leave policymakers with few tools to improve the picture for the foreseeable future.

Though energy and commodities producers see a silver lining in the clouds of the emerging markets, the IMF now believes that the problem is becoming more intractable in those economies. The agency argues that new investment is growing skittish in emerging markets because would-be investors don’t see the demand for their products and services, reducing employment prospects even further and, in some ways, creating a self-fulfilling prophecy.

"These findings imply that living standards may expand more slowly in the future," IMF researchers Patrick Blagrave and Davide Furceri wrote in a review of the WEO. "In addition, fiscal sustainability will be more difficult to maintain as the tax base will grow more slowly."

The warnings from the international financial organization fly in the face of the dominant thinking in energy company boardrooms.

BP is projecting that global energy demand will rise by 37 percent over the next 20 years, driven mainly by growth in India and China. Exxon Mobil holds similar views, foreseeing the world’s middle class more than doubling in as little as 15 years. Both oil majors’ forecasts for energy demand growth are higher than what the International Energy Agency (IEA) is predicting.

Mellen said that while natural gas demand may increase at stronger rates, even the most optimistic view from an international organization sees global oil demand expanding very slowly, by around 0.7 percent per year for the next 10 years, then slowing even further from 2025 or so onward. He said consumption will eventually reach 100 million barrels per day but declined to predict when.

Taking the pessimistic view on growth

Firms reliant on rising energy demand will find the research in Chapters 3 and 4 of the IMF’s new report troubling. Those chapters were posted in advance last week.

In them, the IMF weighs in on a debate that has been raging in economist circles for at least two years. It sides with the pessimists, arguing that the "secular stagnation" theory is likely correct and that the world is entering a state of persistent slow growth.

IMF believes that demographics are a decisive factor. Also to blame, it says, is the slowing pace of technological innovation. Productivity growth appears to be slowing, as well, it says, in both developed and developing nations.

With population growth slowing and populations in the West, South Korea and Japan aging rapidly, demand from these markets is slowing along with those trends. In at least five major economies — Japan, South Korea, Germany, Italy and Spain — populations are expected to gradually decline, representing in sum a wealthy economy of roughly 365 million where energy requirements are either flat or falling.

The economies that the Organisation for Economic Co-operation and Development, or OECD, fears will have perpetually weakening demand are not limited to Japan and Europe. Economic performance in the United States has disappointed lately, and first-quarter 2015 growth may register as low as 1 percent by some estimates. And while many economists assumed that low gasoline prices would boost consumer spending, that didn’t happen.

Demographic disadvantages

Many fear that growth in China and India is being dragged down with weakening demand in advanced economies. Developing nations hoping to export their way to prosperity will have to find other means of achieving higher growth, and they may be failing at this challenge. This may explain why China’s export-driven growth strategy is now hitting a wall.

But demographics are hitting emerging markets as well, the IMF reports, with a trend that began in the early 2000s. Fertility is lower and the size of the working age population in large emerging markets appears to be contracting, especially in China.

"Participation rates of young and prime-age workers in China, India, and Turkey have been trending downward, reflecting wealth effects and increased pursuit of education," the report’s authors say. "Rising life expectancy and falling fertility also led to an overall aging of the working-age population … which in turn exerted downward pressure on average participation rates."

The IMF says the effects were felt most strongly in China and Russia before the 2008 financial crisis and are continuing post-recovery. Analysts write that "working age population growth is likely to slow faster, most sharply in China, and remain negative in Russia."

EY’s Mellen said the IMF’s gloomier forecast has caught many observers off-guard.

"It’s certainly correct to point to the slowdown in economic growth in the developing counties, and I think that was probably a surprise to a lot of people," he noted. "They thought they’d rebound a bit quicker from the global financial collapse. They weren’t hit as bad … but they haven’t rebounded as much as people had expected."

‘Tremendous downward pressure’ in Latin America, Russia

The United Nations made a similar call back in January, when the U.N. Department of Economic and Social Affairs released its latest World Economic Situation and Prospects forecast.

DESA fears that the economic growth situation is more precarious in the developing world, the primary focus of its research.

"Although the baseline forecast projects a moderate growth recovery in 2015 and 2016 for almost all emerging economies, including Brazil, India, Indonesia, Mexico, the Russian Federation, South Africa and Turkey, and only a slight moderation in China, there are significant risks of a further slowdown or a prolonged period of weak growth," the department’s researchers conclude.

The economies of Latin America and the former Soviet Union "are facing tremendous downward pressures," said Pingfan Hong, director of DESA’s Development Policy and Analysis Division. In recent years, Latin America has been a strong source of demand for the United States’ exports of refined products.

DESA is one of the few governmental bodies to have predicted the implosion of the U.S. housing bubble and subsequent 2008 global financial crisis.