Consumer Spending and Investment Could Kickstart New Economic Growth

Dean Foreman
Posted December 1, 2020

The year has brought extreme and at times contradictory information about the economy and our industry, making it increasingly difficult to determine whether the economic recovery has gained firm footing and ultimately traction, in which natural gas and oil will play a key role.

Importantly, we currently see well-grounded pillars for expected U.S. and global economic growth over the next two years – personal consumption expenditures and investment that generally represent the majority of GDP. These could kickstart new economic growth and prosperity that will not only require but fundamentally be enabled by oil and natural gas.

In scanning a wide range of high-frequency indicators of current conditions, there are potential follow-on implications of the 2020 COVID-19 recession but also some green shoots of cautious optimism.

For example, whether we look at fuels demand, flight traffic and dining reservations, they recently stood below 2019 levels. Trends have been especially painful for airlines, movie theaters and restaurants.

Yet, retail sales rose in October year-on-year (y/y), and mortgage applications suggest retail sales and home sales have remained strong.  Since price inflation has remained in check, these tell us that consumers bought more than they did one year ago, and as they buy new homes this generates the need for furnishings, renovations and energy to customize and make those homes more comfortable.

Also notice that vehicle sales and gasoline demand have been down by single-digit percentages from their 2019 levels, which is another sign of relative strength given that the 2020 COVID-19 recession has been the fastest and deepest on record, according to the World Bank.

Of course, uncertainties remain around recent increases in COVID-19 cases and the near-term viability of industries that rely on physically convening people, which may remain hampered until effective vaccines are rolled out. But even with respect to the broader economy and employment situation there have been indications of gradual improvement.

For oil markets, the global picture is paramount, and we are monitoring how small- and medium-sized businesses have weathered the downturn. We also recognize that China is pivotal to the recovery, and the lessons learned from the pandemic still may imply structural shifts for many of our jobs and how we employ information and communications technology.

These are pressure points for world economy that present risks and opportunities, particularly among emerging markets that have shouldered much of the economic and energy demand growth over the past decade and are broadly expected by the third-party consensus – the array of economic institutions that publish their forecasts – to continue doing so over the next two years.

A couple of things stand out in the current economic outlook. First, there appears to be a notable dichotomy between this year – where the majority of the 2020 COVID-19 recession’s impact on global GDP has stemmed from developed OECD economies (as illustrated by the large negative red segment on 2020 GDP growth)– and the anticipated 2021-2022 recovery where about half of the prospective growth is estimated by the third-party consensus to originate in emerging (Non-OECD) economies. 

If these estimates prove to be correct and follow the precedent set by recovery from the Great Financial Crisis, this could have broad implications for United States’ standing in the global economy vis-à-vis the rise of China, India and emerging Asia as well as the exchange value of the U.S. dollar and, consequently, the potential prices of many traded goods and services.

Moreover, the consensus outlook has risen for 2021 and calls for global real GDP growth of 4.8% y/y, up from an estimated 4.4% y/y last quarter. This could tell us that the consensus believes global economic stimulus efforts are likely to succeed. The change also represents optimism for incremental gains of more than $325 billion amid a total increase of $3.9 trillion for the global economy in 2021 on a market exchange rate basis. 

If this holds true, the real economic recovery could the largest for any year on record since 1970 – outpacing by more than 40% that in the wake of the Great Financial Crisis.

The next natural question is, why should we believe the consensus outlook?  After all, virtually no one saw the pandemic coming. However, the answers are rooted in basic arithmetic.

When we look at global GDP added up by expenditure category, as the United Nations does, private and government consumption represent nearly three-quarters of activities, and 27% stems from capital formation/investment.

History is clear that global consumption and investment have continued to rise, especially in Asia but also across North America and even Europe. As the timeless economic maxim generally suggests, “more is better,” and based on International Monetary Fund projections this economy should have legs.

So, although we clearly have challenges ahead, the U.S. and global economies appear to have pillars upon which to found new growth and prosperity over the next several years, which could represent credible signals amid noisy data. 

Together these points give us cautious optimism that better days could be right around the corner.