Despite the revelation this morning from Reuters that China is prepared to increase its budget deficit to 4% of GDP in defensive of not only the 5% GDP growth target next year but probable trade war with the USA, it cannot cover the lack of spending that remains a stubborn attribute of its populace. A point well made by Reuters is that such legislation is not announced until a parliament sitting in March giving time for plans to be changed or watered down, a thought that is the right of cynics given the mouthing of much and delivering of little in the recent steps deployed by China to befuddle markets. Bourses see little reaction and oil prices at present remain largely unimpressed. 

Indeed, the poor showing of China data yesterday and the abject performance in global manufacturing PMIs maintains the idea that beyond tariffs on Russia and Iran, demand doubt is never far away in oil thinking. Whatever micro concerns our market might hold, they are outgunned by the decisions of the Federal Reserve and the Bank of Japan on the state of their interest rates. The US FOMC is all but assured to cut by 25-basis point, but there is growing belief from various economists and commentators that forward policy or 'dot plot' might just be tinged with more hawkishness. With the BoJ hamstrung in thinking, it is likely to leave rates well enough alone and for oil prices that can only mean another rally in the US Dollar and another negative asset along with the political turmoil in Europe as German Chancellor Olaf Scholz yesterday lost a vote of confidence.

The France downgrade highlights greater problems

The European Union seems to be lurching from one crisis to another and nothing brings trouble into focus more than money. In another rebuke to its financial status and let there be little doubt a damning downgrade on France is one for the Union to share, the rating agency Moody’s lowered Europe’s second-largest economy from Aa2 to Aa3 in its long-term issuer rating citing the national deficit and the political inability to deal with it. The country’s debt-to-GDP ratio would increase from 113.3 per cent in 2024 to 120 per cent in 2027. This outlines a possible spiral in fortunes as the agency warned of a negative feedback loop between higher deficits, a higher debt load and higher financing costs, against the backdrop of significant annual borrowing needs. When considering the European Union’s rules that require nations to keep debt to 60% of GDP, so massively breached as highlighted, and a budget deficit under 3% whereas France’s runs at 6.1%, Moody’s had little choice in emulating the move already seen from S&P and a warning to do the same from Fitch.

There now becomes an obvious mismatch in how the economy of France needs to be tightened to stave off spiralling debt and the Union as a whole that needs to adopt some sort of accommodative action enabling not only a reversal in the continent’s economic fortunes but also a guard to what seems an inevitable trade war with the United States. The issues for France and Europe are mirrored with that of Italy which boasts an even greater debt-to-GDP ratio of over 135% and so the conundrum continues. The ECB has set its mark of inflation to be consistently within the realms of 2% for it to be able to reduce interest rates, and that has played out as seen by the 2.3% reading of inflation in November and last week’s 25-basis point cut. Yet, stable inflation has not instilled growth. Retail Sales declined by 0.5 in October and as is the case for global central bankers, it is the behaviour of the consuming public that has great influence on monetary tweaking. In comments yesterday after last week’s rate cut decision, ECB President, Christine Lagarde referenced inertia in consumer spending as one of the main drivers on why the ECB expects to lower interest rates further. France and Italy may get some reprieve in the costs of servicing debt, but it will be negated by rating downgrades. The economic failures of the EU, its lack of coordinated foreign policy, as seen with individual dealings with Russia after the invasion of Ukraine and an inability to keep up with the technological leaps experienced in the US and China, sees stagnating productivity witnessed in the PMIs yesterday which saw a reading of expansion in only Services in Germany and Europe with all of France’s in contraction.

If Moody’s spots a loop in the woes of France and indeed the continent, the combined lack of consumption and growth can only lead to a similar spiral in oil demand. Confidence markers remain in a sullen state, in November Consumer Confidence fell by 1.2 points to -13.7 according to the European Commission which reported on a souring of outlook for the economic situation by consumers as they adopted negative attitudes in their household’s financial and overall economic situation. Outside of the protagonists themselves, Europe bore the brunt of the financial fallout from the Ukraine/Russia war, and this continues today. Whatever financial creaks and cracks lay hidden in the Union as it tried to absorb new entries including the Balkan states into membership, they have been laid bare. Sadly, with Germany barely registering a pulse when compared with its recent history, it is unable to repeat the largesse that ordinarily glued Europe’s gloriously differing countries together. France and Italy, second and third economies, are hamstrung with debt and every other component country in some sort of political nationalistic zeitgeist meaning parochial concerns will come to the fore and union confidence will not improve. Pair the emotional data with the activity data and the lower industrial activity that triggers reduced transportation in all forms continues to mean oil cannot look anywhere within Europe for increased demand. With Europe headlong, and in some ways suicidally, intent on an alternative energy and EV future, the politics of ideology and financial constriction will pay a price in some way with one of them being oil demand.

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