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Features

Market Outlook 2018: A Sunnier Mood with a Few Caveats

The atmosphere at VMA’s 2018 Market Outlook Workshop was much more positive than what’s occurred the last two years, with many members reporting bidding and orders up. The presenters themselves expressed cautious optimism and pointed to many signs that say the economy in 2018 will continue its slow, steady upward trajectory, contributing to a long-term outlook that’s bright.

For 2017, global trade has grown higher than global Gross Domestic Product (GDP), a sign that many countries are sharing the upturn. Still, many of the presenters focused on the fact companies are not spending their cash on capital expenditures, nor are they taking advantage of the current low interest rates. As Simona Mocuta said in her presentation on the global economy, ”We need business investment to pick up some of the baton for growth.” (In the U.S., she pointed out, that growth is currently fueled mainly by consumer spending.)

Presenters also said they generally accept that the energy and commodity recession of 2014 is still not finished—gas, oil and metal prices show no signs of rising substantially in the next few years. However, cyclical momentum has improved substantially from 2016, and prices are expected to continue to rise slowly until at least 2020.

The most significant opportunities for growth in North America remain the likelihood natural gas exports will rise and that more petrochemical plants will be built or are in the planning, several outlook speakers said.

Meanwhile, the looming problem of the labor shortage and declining productivity also came up frequently in this year’s comments as did Europe’s strengthened economy and the good news that fears over Brexit have generally been allayed.

Some noteworthy developments

North America, and in particular, the U.S., has become a swing producer of oil and gas—what happens here now affects the global picture.

While the low unemployment rate is positive, the lack of growth in wages is keeping inflation below the ideal rate. Also, labor shortages in the U.S. are turning out to be a major issue because too much of the workforce is retiring or set to retire.

Consumer spending has been the engine driving economic growth following the recession, but this is not sustainable. Government and private companies generally are not making capital investments in equipment and training, which is needed for real economic growth.


OIL AND GAS

Activity Up Substantially

The global oil market has entered one of the most transformative decades in its history as the U.S. becomes the world’s swing producer, with implications for commodity price volatility, according to John Spears, president of Spears and Associates.

Global oil consumption is forecast to rise 1.6% per year from 2016 to 2020, exceeding 103 million barrels per day (bpd) by the end of the decade, he said. In industrialized nations, falling fuel use for passenger cars has been offset by rising demand from aviation, transportation and petrochemical feedstock use. Meanwhile, in emerging markets, oil demand is rising at 2.5−3% per year.

17 MOW 1

U.S. oil production is expected to increase 27% from 2016 to 2020 to 11.3 million bpd, while relatively little new production will come onstream outside North America during that timeframe.

The Organization of the Petroleum Exporting Countries (OPEC) producers have indicated they are returning to the traditional exercise of trying to manage end-use inventories as a way of managing prices. But the combination of rising U.S. oil production and surplus OPEC capacity (currently running at 3.5−4.0 million bpd) is expected to keep prices from exceeding $55 for the near term.

Globally, production is expected to reach 100 million bpd, but that doesn’t replace a decline from old wells, which is falling by about 2% (1.5 million bpd) per year. Since OPEC’s spare capacity currently is about 4 million bpd that means falling capacity over the next 2−3 years will tighten the market, but not until after 2020.

Spears also noted fewer fuel development projects are being sanctioned. Traditionally, about 50 such projects are approved each year, but that compares to only about 15 new projects in 2015 and about 12 in 2016, a trend he said will extend in the short term.

“That means we’ve been under- sanctioning for 2015, 2016 and 2017,” Spears said. It also means there will be many fewer barrels coming onstream over the next three years because of the paucity of new projects and the decline of older wells.

Meanwhile, “There is the possibility of real disruption in Venezuela,” which puts at risk about 2 million bpd.

Still, “Apart from that, the market is pretty well balanced,” he said.

As far as consumption, domestic gas use now accounts for 90% of U.S. gas demand (the balance of gas is exported). Because of a warmer-than-normal winter and price-induced fuel switching within the power sector, gas consumption in this country is forecast to fall to 73.4 billion cubic feet per day (bcfd) in 2017 (down 2.3%). In the longer term, though, U.S. gas use is expected to grow 1.5−2.0% per year from 2016 to 2020 because of industrial and power sector demand.

Currently, imports are almost all by pipeline from Canada, while exports are almost all by pipeline to Canada and Mexico—nearly 4 bcfd. Spears reported that the Mexican power sector is building up and using natural gas for feedstock and the cheapest source is U.S. pipelines.

Rig Activity

Spears pointed out that at $50 per barrel rig activity flattens out.

“But despite the softness of oil prices in the second quarter of 2017, drilling plans for large operators seem firm through the end of the year while smaller operators are likely to scale back activity in the second half.”

Of the 24,000 new wells expected to be drilled in the U.S. this year, 70% will be drilled horizontally. Canada expects about 7,000 new wells. Horizontal drilling/hydraulic fracturing will be the primary methods used by North American operators to manage cost and geological risk, Spears said.

Overall, Spears expects the global market for oilfield equipment and services will total $225 billion in 2017, up 3% from 2016.

“Based on the outlook for drilling activity and oilfield inflation, we expect that to jump to around 20% in 2018,” he said.

17 MOW 2Forecast

  • Prices are expected to trade in the $45−$55 range over the next 2−3 years.
  • For the first time since 2015, gas output rose in this country in the first quarter of 2017, and it is projected to average 74.1 bcfd this year and rise 4.3% in 2018 as drilling activity recovers.
  • U.S. rig activity is on track to rise 70% this year and about 8% in 2018 while Canadian rig activity is poised to jump 75% in 2017 and another 5% in 2018.
  • In the U.S., drilling activity will be up 58% in 2017 and another 6% in 2018. In Canada, activity will be up 75% in 2017, with another 8% in 2018.
  • The global market for surface and subsea equipment, including wellheads and Christmas trees used on- and offshore, is forecast to total $18.6 billion in 2017, down 1% from last year, but is expected to rise 17% to $21.9 billion in 2018.

LNG

A Deepening Market

Ken Medlock, senior director, Center for Energy Studies at Rice University’s Baker Institute reminded Market Outlook attendees that there are massive numbers of people today striving to achieve the same levels of economic development that we have in North America. The question becomes: How much fuel is needed to make that happen and where will the world get that fuel, he said.

Much of the projected demand will come from developing Asia, and LNG is likely to play a critical role, he said.

India’s economic picture is similar to China’s in the early 1990s, when that country started to become a driver of global oil market development, Medlock said. That influence continued into the early 2000s and was the impetus for oil price increases in 2008.

If India could do in the next 15 years what China did in the last 15 years, it would have a huge impact on energy needs, he pointed out.

While “You can’t assume that will be the case, you will see the lights get brighter and energy demand go up,” he said.

In North America, efficiency is reducing the amount of energy required to meet population growth, he continued. There is also declining demand in some European countries and Japan simply because the populations are aging, not growing. Weak economic growth also means lower energy requirements in developed nations.

All of these factors affect energy growth, which in turn, affects the LNG market, he said.

17 MOW 3Shale Productivity

Questions remain regarding the opportunities for shale and other frontier resources outside the U.S., but overall, there has been tremendous growth in productivity in North American shale production.

“Productivity enhancements such as decreased spacing and shorter fracks have made Tier 2 acreage less expensive so you have bigger gains than in the Tier 1 acreage,” Medlock said.

That can have a significant effect. “If you’re between 25% and 35% recovery in a field, that’s good,” he explains, “but what if you expand that to 45% or 50%? That means a lot more natural gas.”

Meanwhile, LNG trade has more than doubled in the last 15 years and, although stagnation has occurred in the last five, that’s based on global economic events, which affects overall gas demand.

The Market’s Makeup

The composition of LNG importers has changed significantly. In the early 2000s, the market was Japan and South Korea. But in the last few years, China and Taiwan have increased their purchases. LNG exporters are also changing, Medlock explained, with countries such as Qatar sending more of the product out and Indonesia sending less.

This means that while the global LNG market is growing, it is also becoming deeper. Market depth matters because of how risks are shared and how money comes into the market. The trade of LNG has gone from 5% participation by countries to nearly 30% while spot and short-term trade as a fraction of all trade has more than quintupled. According to Medlock, this is consistent with economic theory and indicates a rapidly evolving global LNG market.

17 MOW 4Opportunities in North America

There are about 2,500 trillion cubic feet of natural gas available in North America at wellhead prices below $6 and 1,700 trillion cubic feet at wellhead prices below $4, and if improvements in extraction continue, there will be even more. That does not mean that North America could export 20 bcfd of gas per day, however. Such a move would saturate the global market and crash prices worldwide. Also, the U.S. is not the only player. Qatar and Nigeria are just two other countries with huge resources.

Global demand for U.S.-sourced gas, which is a function of the cost of other sources of gas around the world, plus domestic demand are going to determine production figures in this area of the world, Medlock said. Shale is the driver of domestic supply, specifically the Marcellus field because its geographic footprint is large, giving producers there access to multiple markets. The only current constraint at getting to this supply is infrastructure.

Going forward to 2020, there also will be development of the massive Haynesville play in southwestern Arkansas, northwest Louisiana and East Texas.

Prices

U.S. prices for gas remain among the lowest in the world, and based on current costs of production and worldwide demand, Medlock sees little chance for drastically higher prices. The most significant impact that expansion of U.S. capability to move gas abroad will be felt outside the country, he said.

Medlock said those following the world of gas need to be aware that five years ago, the spread between production cost and price was high; that situation is beginning to collapse.

Forecast

  • LNG trade exports will increase in multiple locations, with the U.S. emerging as the third largest LNG exporter behind Australia and Qatar over the next decade or so.
  • New consumers of LNG will enter the market as global demands for gas increase.
  • The deepening market will alter trading paradigms. North America is positioned to capture an increasing role in the global gas market balance.
  • Price will depend on multiple factors with weather the biggest short-term driver. It is important to pay attention to what Russia could do, because if Russia perceives a potential U.S. entry into the European LNG market, it will cut prices.

PETROCHEMICAL

Economics are Key

The primary driver of the petrochemical sector is general economic growth—as long as global demand grows and North American oil and gas prices remain low, North America will be the most attractive place for new investment in this market, according to Mark Eramo, vice president−Oil/Midstream/Downstream/Chemicals, IHS Market.

Since global economic growth is expected at rates of 2.5−3% in the coming years, that means consumption of durable and non-durable goods will increase, which means petrochemicals will be more in demand.

Meanwhile, a need for plants grows. A world-scale polyethylene plant, for example, processes 1 million tons per year, which would mean that at expected growth rates, about five plants will be needed just in the next year. The picture is even more complicated by the fact that, when planning for demands and number of needed plants, the source of the feedstock must be analyzed as well as what price that feedstock will be and where else in the world demand may arise.

17 MOW 5As long as natural gas has advantages in the energy market over crude oil in North America, that area of the world will remain an attractive region for base chemical and derivatives capital investments. If crude went significantly lower or gas much higher, building such plants would not be as attractive.

In 2014, when crude was above $100 per barrel, packaging companies were looking for ways to use less plastic, including using paper, recycling plastic and making packaging less dense. When the prices fell, producers looked for ways to lower production costs, margins got better, natural gas as a byproduct was produced and shale gas contributed to prices that are now low enough to give North America an advantage.

Today, the low price of oil is pushing out recycling because it’s less expensive to use crude. But if prices go up again, or environmental concerns take precedence, the market forces could change how much plastic consumers use.

Because of all this, the outlook from IHS Markit is positive over the next couple of years as the demand for plastics and other chemicals grows and the need for more plants rises. The challenge is to align capacity additions with growth.

17 MOW 6In the World

Driven by a number of major initiatives, Chinese investment in base chemicals has accelerated since 2000 and will continue into the 2020s. China has secure energy sources and a feedstock advantage. It can leverage current technology and build world-scale facilities. Investors in the Chinese market also are close to local markets and access to trade routes and have plenty of opportunity to leverage their upstream and/or downstream integrated position (i.e., a company has access both to low-priced feedstock and a way to get finished product to market).

Saudi Arabia and Iran are currently leveraging the low cost hydrocarbons to drive industrial development while South Korea, Singapore and India are driven by strong demand growth. Mexico and Canada are linked to strong demand via the North American Free Trade Agreement, but limited by current energy prices.

Forecast:

  • Eramo projects the need for ethylene will grow 5.5−6 million tons this year, propylene 4−4.5 million tons and methanol 3.5−4 million tons.
  • Because of current market uncertainty causing delayed project approvals, IHS Markit expects falling capital spending across global chemical markets by the early 2020s.
  • Capital spending slowdown will create tight market conditions in olefins and chlor-alkali by the end of the decade.
  • North America will remain an attractive region for petrochemical and related investments; investors will include both domestic and foreign companies.

POWER

Driven by Capacity

Although power generation in North America is a $712-billion industry and more the $5 trillion in projects has been proposed worldwide, not all those projects will go through, according to Britt Burt, vice president of global research for the power industry at Industrial Info Resources Project (IIR).

In 2010, for example, only about 39% of identified projects went ahead while in 2017 that number is slated to be about 44%.

“There are many delays, project fallouts and cancellations because projects are competing against each other for the same capacity,” he said.

In Europe and North America, the capacity is generally slated to be filled by renewable energy and natural gas—two markets already mature at a time when power demand is not growing much. However, in South Asia, the huge demand is growing at about 8−10% per year, and baseload plants will include coal to fulfill that need. Meanwhile, China is pulling back from coal power, and India currently is building 100 gigawatts (GW) of renewable energy, much of it solar, small hydro projects and some wind. In general, the developing countries are more likely to build coal-powered plants simply because of the low cost and availability of coal and the huge demand increases.

17 MOW 7In the U.S., state and federal tax credits are in place for renewable power projects though Burt expects these to be removed by the current administration.

“Those I’ve talked to in higher-level executive positions in utilities and private energy producers say they have charted their course for more lower carbon fuel sources, and they are following that, no matter what the current administration says.” Burt also pointed out that the nation is currently meeting another round of renewable standards, but that future generational mix will be defined by natural gas prices and electricity demand.

Demand for power in North America is only growing about 1% a year, thanks in part to the energy efficiency programs. Burt said he does not see that changing for the near term, and much of the natural gas-fired capacity moving forward is to replace capacity lost from retired coal plants. Over 85 GW have been retired since 2012, he pointed out, mostly coal and nuclear, and older, less efficient Rankin cycle natural gas facilities that can’t operate competitively.

Burt also noted that environmental regulations continue to target coal-fired power plants, but that: “We will continue to see investment for aging assets that need repair and replacement of parts, so there are opportunities there as part of modernizations and life extensions.”

Going Forward

IIR is following the progress of 270 natural gas-fired projects valued at over $103 billion from 2017 to 2022. “When we apply a ‘confidence factor,’ it is 64% on natural gas-fired projects based on what has moved forward in the past,” he said. Using those figures, about 184 of the projects would go through at $64.4 billion, he said.

Some small hydroelectric projects are in the works along with modernization of existing facilities, which Burt believes is a potential market going forward. In-plant capital expenditures will include replacements, refurbishments and closures, expected at almost $10 billion, to be spent during this five-year period.

Other growth will come from industrial energy producers that have incorporated co-generation as part of their manufacturing or processing plant, he said. That includes metals and mining (because of isolated locations) but also the oil and gas and pulp and paper sectors. “Some of those [pulp and paper plants] can make more money selling power than they can making paper!” Burt noted.

Despite the Trump administration pushing for a comeback for coal, Burt doesn’t see it happening any time soon in the U.S.

Forecast:

  • Burt projects 18 GW of natural gas-fired capacity to start in 2018 and said that Texas is one of the hottest areas for development. Also, in Pennsylvania and Ohio, coal closure and plentiful natural gas from the Marcellus make the potential for natural gas-fired plants good in those states.
  • The transformation of the power industry will continue as North America shifts new builds away from coal to natural gas and renewable energy.
  • Investment in the coal and nuclear sectors will be centered around in-plant capital and maintenance.

WATER AND WASTEWATER

Funding Remains the Issue

Funding remains the most significant issue for the water and wastewater sectors, according to Gene Koontz, senior vice president at Gannett Fleming.

“Federal funding is only about 10% of the money,” he said. “WIFEA [the Environmental Protection Agency’s (EPA) Water Infrastructure Finance and Innovation Act] is infusing money into municipal water and wastewater, but most funding for water is funded through customer rates.”

[*Ed. Note: As of July 2017, EPA had $1.5 billion in available funds for 2017. These funds come in the form of low-interest loans that must eventually be paid back with interest.]

Current State of the Industry

Koontz noted that the most pressing problem in the water and wastewater industry also has not changed in several years: The huge gap that exists between available financing and the need to renew and replace aging infrastructure.

Meanwhile, conservation is driving down water use while revenue is dropping, which means rates must increase. However, public understanding of the value of water is not good so rising rates are not accepted, he said.

Koontz said two factors that drive the water/wastewater market and their current state are:

  • Economics: Most utilities are owned or otherwise controlled by municipalities, and when the economy is down, towns tighten spending. Continued economic growth of the area can help the sector, but it’s also affected by factors such as when the price of copper doubles.
  • Regulation: There have been few regulatory developments driving growth in the last year, Koontz said. One is the need to restructure combined sewer overflows, which is a $40 billion project nationwide. Combined sewer overflow, in which the domestic sewage and stormwater are in one pipe, was common in the 1960s and 70s, but that’s no longer the case and systems are seeking to separate the two, he said.

No new major regulations regarding drinking water have occurred in the last decade, but Koontz expects that may change. He pointed out customers in recent times are driving what happens. “If something is found in the water supply, a customer demands action,” he said. “That will drive work for new plants and alternative supplies,” he said.

17 mow water revisedAnother recent trend in the water industry is the call for reuse, which is driven by water scarcity and wastewater discharge limitations. “It started in California, Arizona and Florida [which have suffered droughts] and is still predominant there, but is starting to creep into water-rich areas,” he said.

Stormwater is emerging as an issue in many places because runoff can affect water quality by leaving behind micro-pollutants and sediment and taking away nutrients. Stormwater control has been estimated as a $100 billion market over 20 years, but about 70% of that is for green infrastructure projects such as parks, streetscape, barrels. Only 30% will be going into infrastructure, he said.

Koontz noted that, in the past, regulatory action drove work; currently it’s inhibiting it. “Trump EPA cuts could have a significant trickle-down impact,” he said.

Meanwhile, today’s drivers include:

  • Repair and Rehabilitation: The American Water Works Association estimates that, because the pipes and systems throughout the U.S. are in such bad shape, the repair and rehabilitation of buried water infrastructure could cost $1 trillion in the next 25 years. “Few systems are keeping pace with these desperately needed repairs,” Koontz said.
  • Efficiency: Wastewater plants are now “resource recovery systems,” reclaiming water, energy and nutrients coming into the plants. All utilities are also looking at renewable energy, including small hydro projects.
  • Water Scarcity or Disaster Recovery: Events related to climate change, including drought and flooding are happening more frequently. Scarcity is the driver behind reuse where there are real and continuing issues in California, Arizona and Florida.

Forecast

  • Water and wastewater in 2018 will be about a $45 billion industry in this nation. However, needs are $150 billion per year, which means the country is falling 70% short for the next 10 years.
  • Expect growth of the market at about 3−6% annually in the immediate future, without any major disruptions. California, Texas and Florida will continue to dominate the market.
  • Because of the lack of regulatory drivers, growth will be mainly from repairs. However, even if funding were available for everything that needs to be done, “there is no way” the nation could respond rapidly enough. “There are not enough skilled plumbers, electricians, carpenters to cover it,” said Koontz.

WALL STREET

An Unusually Long Cycle

Michael Halloran of Baird and Company challenged attendees about why they should care what happens on Wall Street. The reason, he said, is that what occurs in the markets is a good indicator of sentiment, which makes it a good predictor of demand.

Where are We?

The nation currently is in an unusual economic cycle, according to Halloran. He said Baird’s feeling is that the year 2017 is late in that cycle and that a recession is not imminent.

“This is particularly important in the context of the recovery from the Great Recession because this cycle is the third-longest expansion on record with persistent low growth and lagging industrial production,” he said.

Significant central bank intervention has elongated the cycle and also changed its growth characteristics, he said.

The Macro Environment

The U.S. dollar strengthened in 2016 and although it was weakening at the time of the workshop, Halloran says the year will end with strength.

China’s debt-fueled growth has given way to slower economic trends, and there are systemic concerns about the country’s financial sector. While China is currently considered healthy (especially when compared to other places around the world where political instability and gridlock are prevalent), uncertainty exists about what the government will do next.

In most countries, the biggest wildcard is the action of the central banks; their policies continue to drive markets.

17 MOW 9For example, in the U.S., current lending standards are expected to continue to support business investment, but Fed rate hikes and other inflationary pressures could drive a tighter lending environment. Halloran said there is some indication that’s occurring, which could lead the country into recession. But, “Don’t get too caught up in timing,” Halloran warned. “It is just an indicator.”

U.S. and global industrial production growth slowed in 2016, but is improving in 2017. Still, industry participants have cited concerns about the health of the general industrial economy in the backdrop of overcapacity, indebtedness and political uncertainty globally, he said.

Global fixed investment (GFI) has slowed in recent years. Customers continued to push out investment decisions through 2016, but things seemed to be improving in 2017 (as of the workshop). There are still concerns about large project delays as many end users continue their “wait and see” approach, Halloran said.

Current Process Industry Demand

The 2017 demand outlook for process industries both geographically and by end users is increasingly positive. However, continued uncertainty indicates that process control companies are not going to significantly increase business through 2017.

The demand globally is “driven by a combination of restocking from low levels in 2016, replacement and aftermarket needs. Repairs just can’t be pushed out any longer,” Halloran said. Other factors boosting demand in 2017 included post-election enthusiasm and rising business confidence supported by expectations for fiscal stimulus, deregulation and tax reform.

Looking Forward

Halloran said to expect a low-growth environment for the remainder of this business cycle. Government and central bank actions in 2009/10 staved off a Great Depression, but they left the global economy hobbled by effectively dismantling or limiting free market mechanisms that support much-needed economic rebalancing, he said.

Overcapacity remains a major problem across most industries because firms that would have exited the market via bankruptcy have been kept afloat by artificially low borrowing costs. Global indebtedness at all levels—government, corporate and consumer—is at or near peak historical levels and continues to worsen. High levels of debt generally result in tightening of money.

For process markets, this low-growth environment means commodity price volatility is here to stay until the supply/demand imbalances are resolved. It also means the project environment is likely to remain weak as persistent price volatility hampers investment decisions, Halloran said. Pricing power is unlikely to recover until capacity tightens or inflation gains traction, he said.

Halloran stressed there will be no help from Washington. “The uncomfortable truth is that many of the hoped-for tailwinds from government are unlikely to materialize.”

FORECAST

  • Upstream oil and gas markets are recovering with North American onshore drilling leading the way and offshore and international activity remaining soft.
  • Midstream activity appears healthy, aided by the release of previously stalled North American projects in early 2017.
  • General industrial demand is recovering but ongoing sluggishness offers little incentive for companies to invest in capacity expansions and facility upgrades for the immediate future.
  • Chemical demand is robust, aided by low feedstock prices and growth in the North American export capacity.
  • Municipal water and wastewater has been a serial underperformer for this cycle, but will improve going into the new year.

INTERNATIONAL OUTLOOK

Growth Elements Sluggish

The world’s economy has been struggling to get back to a traditionally normal rate of growth since the crisis of 2008, said Simona Mocuta, senior economist at State Street Global Advisors.

“There has been improvement but it is still sluggish. Part of the problem is that the ingredients for growth have weakened.”

Those ingredients include labor, capital and productivity. Labor is currently a strong concern influenced by the aging workforce.

“The labor pool is shrinking, and there isn’t much that can be done to change that. Even though there is nearly full employment, there is also a drop in participation, led by men,” she said. “Additionally, those that are in the workforce are less productive, and nobody is able to understand why,” she added.

As far as the final ingredient of capital, some economists insist that businesses are not investing enough so growth cannot occur. Mocuta believes, however, that companies are investing at a rate justified by the current market conditions, and that slow growth in the U.S. can also be blamed on the lack of private domestic residential investment since the crisis of 2008.

She said she named her presentation, “Structural Headwinds vs. Cyclical Boost” because the structure of the economy that is currently with us will be with us for awhile. However, cyclical momentum has improved substantially from 2016.

The energy/commodity recession of 2014 is now over, she said, even though prices have not increased. Commodity exporters have stronger terms of trade and capital spending has stabilized and is picking up, she said. “There is reason to be optimistic as the increases in manufacturing this year are not just because of policy in the U.S. or the rise in the stock market. It is a world-wide phenomenon. We are on the upside.”

Other issues in the U.S. are wages and the low rate of inflation. If wages don’t inflate, neither will the economy, she said.

“The question is, what is stopping wages from rising?” Mocuta asked. She said one possibility is older people retiring at higher pay to be replaced by lower-paid younger people. But, “There are also many people staying in existing jobs without any wage increases.”

17 MOW 10Outside the States

Mocuta noted that, cyclically, Europe is recovering, but the problem rests with the structural issues in the way the Eurozone is set up. It poses many challenges for countries like Italy that are not competitive.

The other issue is the United Kingdom and Brexit. “We are inching toward some sort of transitional agreement,” she said, which is a better arrangement for companies unsure how to deal with the whole scenario. Despite Brexit and uncertainty, the European employment rate is growing rapidly and the labor participation rate is increasing.

Growth in Canada is broadening as well, Mocuta said. “It’s not just Toronto or Vancouver; the resource provinces are healing as well. In fact, the Bank of Canada finally started raising interest rates, so that’s a good sign,” she said.

Meanwhile, China is no longer as export reliant as it used to be, Mocuta said. “Even though we still hear the rhetoric of 10 years ago, today, Germany exports more than China,” she said. “Services are now China’s largest employer,” she said. Meanwhile, the country’s government has an industrial policy that aims “to produce champions; they’re in the next stage of technology development,” she said. In other words, instead of going after industries such as mining, they’re going after more modern industries.

Forecast

  • While the global economy is strengthening, some structural issues remain. In the U.S., the unprecedented drop in labor force participation and wage stagnation is constricting growth while the Eurozone’s fixed-exchange rate regime means some countries such as Germany will boom while countries such as Italy are doomed to stagnate.
  • Japan’s growth will continue to be mediocre but steady while Canada’s cyclical upswing is in full force and expected to continue over the next year.
  • In the U.K., the labor market is still resilient, but rising inflation will hurt households’ purchasing power throughout this year and into the next.
  • China’s producer pricing power has improved along with industrial profits, but China’s debt is a drag on stability.

THE U.S. ECONOMY

Good Signs

According to Maria Luengo-Prado, senior economist and policy advisor at the Federal Reserve Bank of Boston, the U.S. is seeing positive economic signs.

The U.S. labor market has improved substantially since the Great Recession and the unemployment rate is now below the Congressional Budget Office’s estimate of the full employment rate, she said. (In today’s economy, full employment means approximately 4.6%.)

On a 12-month basis, inflation has declined recently; the core measure is running somewhat below 2%, which is the goal set by the Federal Open Market Committee. However, the Fed believes that healthy wage growth will put some pressure on inflation.

Meanwhile, the labor force participation rate has remained relatively stable over the last few years at roughly 63%, which points to a very strong labor market, especially considering the aging of the population.

17 MOW 11GDP growth in the first quarter of 2017 slowed to 1.2%, but strong growth in the second quarter was expected to continue the rest of 2017. Luengo-Prado said the general consensus at the Fed is that the economy is stable; the recovery from the Great Recession is ongoing; and financial markets are doing well. Even though those markets were at historical highs at the time of the workshop, Luengo-Prado said she sees little likelihood of a drastic drop in value.

Lending standards for commercial and industrial loans to large and medium firms have eased somewhat, which is helping investment gain momentum. But Luengo-Prado pointed out companies are still not investing much. “Only recently have companies begun buying things again. It’s important to continue investing in your businesses with equipment, training, etc.” she said.

The Forecast

  • The Fed’s dual mandate of meeting a flexible employment goal and an inflation goal of 2% is within grasp at this time, so the outlook for the rest of 2017 is strong.
  • The Fed expects the growth rate of GDP will be around 2.2% in the near term.
  • The unemployment rate will continue around 4.3%; the inflation rate will be about 1.6−2%
  • The Federal Funds Rate will gradually be increased to 1.4%

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