How post-covid economic recovery is shaping global supply and demand

China: Tackling falling prices

One of the most striking aspects of the shifting global economic landscape is the situation in China.

After the outbreak of the Covid-19 pandemic in early 2020, the Chinese government was forced to make difficult decisions. Authorities implemented large-scale stringent preventive measures, disrupting economic activity and people's movement.

China continued to enforce these measures even after many other countries had started recovering from the impact of the pandemic. The measures constrained consumers, leading to a significant decline in spending. Lockdowns also disrupted factory operations and cut productivity.

Since the beginning of April, signs of deflation have started to emerge, including declining retail sales, reduced levels of investment spending, decreased real estate transactions, and an uptick in youth unemployment.

These conditions pose a challenge to the economic and monetary management of the country. China's leadership is unique, in and of itself, having transitioned from a totalitarian, centrally-planned system to what many call a "socialist market economy".

Since the structural transformations in the Chinese economy began in 1978, the rate of economic growth has consistently exceeded 9% annually. These transformations have lifted hundreds of millions of people out of poverty and improved the standard of living for millions more.

Furthermore, Chinese citizens have increasingly gained access to high-quality education and adequate healthcare, leading to increased life expectancy.

There have been great leaps forward in infrastructure and essential services. However, economic openness has largely depended on the decisions of the central government and the policies of the ruling Communist Party.

Deflation is a new phenomenon to China's senior leaders and policymakers.

Falling prices can constrain demand by providing a disincentive to spend when cheaper goods and services are widely available. To combat the problem, China has forced banks to provide loans to citizens and institutions, to stimulate spending.

Another pressing issue is the decline in demand for housing at a time when there is a healthy supply due to a sustained construction boom. The government is offering financing to encourage citizens to purchase homes to protect real estate companies from folding.

One of the biggest names in the sector, Country Garden, is struggling with bank debts amid the property downturn. It reported more than $7nb in losses in the first half of 2023.

The West: Taming rising prices

While China faces falling prices which could lead to a potential recession, nations that fought bitterly against inflation look better poised for recovery.

Official data show that the US economy grew at an annual rate of 1.5% in the first half of 2023. JP Morgan's estimates point to an annual growth rate of between 2% and 4%. Either way, economic conditions in the US look promising, with good prospects for doing business and creating jobs.

The Bureau of Labor Statistics released a report indicating that around 187,000 new jobs were created in July 2023. The unemployment rate also hit 3.5%. This low rate confirms the robustness of the US job market.

And easing inflation data means that the Federal Reserve may be able to ease the pace at which it lifts interest rates in upcoming policy meetings. This would help institutions to access financing at reasonable costs.

Inflation data also shows a decline in core inflation rates, which excludes fuel and food prices. However, inflation in service prices remains relatively high, reaching 6.1% in July after reaching its peak at 7.3% in February of the current year.

Despite some observers' reservations about the current administration and its economic performance, the Organization for Economic Cooperation and Development (OECD) stated in a June report that the US economy has managed to overcome the challenges of the pandemic, inflation dilemmas, and the resulting tight monetary policies.

Europe: A victim of inflation

The European economy has had deeper problems with inflation, and in many ways has fallen victim to rising prices.

But despite the slow response from the European Central Bank (ECB), the economic performance in European Union countries has improved since the beginning of the year. According to the OECD, the value of all the goods and services produced by the bloc rose by 0.3% on an annual basis in the second quarter.

Inflation was the main issue faced by the EU and now looks to be under control, falling from 5.5% in June to 5.3% in July. And as energy prices continue to ease, the ECB's inflation target of 2% is moving into view, as supply crises in the manufacturing sector also wane.

Japan gets its mojo back

The Japanese economy, which is largely dependent on exports, has grown significantly in the second quarter of this year.

Its quarter-on-quarter annual growth rate reached 6%, as demand for its exports bounced back. The sheer scale of growth has boosted the country's stock market and the country's main equities index, the Nikkei 225.

The yen strengthened against the dollar and other major currencies, in a turnaround of sentiment after a bleak run for the Japanese economy since the 1990s, troubles which included sharply lower real estate prices.

At the same time, Japan faces structural challenges that are primarily related to demographics. The country's ageing population has grown, while the number of young people and those of working age has dropped.

The Japanese statistical office reports that the country's population has reached approximately 125 million people, indicating a very modest annual decline of around 0.07% — but a decline, nonetheless.

How does all this impact demand for oil?

We are confronted with a global economic landscape characterised by disparities in the performance of major economies.

The Chinese economy is contracting, the US economy is improving, and the European economy is growing at a moderate pace. Meanwhile, Japan's economy continues to astound with its remarkable growth momentum.

For the Middle East and the Gulf, the fundamental issue is the outlook for oil demand.  

This will be shaped by the extent to which oil-consuming major economies can overcome the decline in demand caused by ageing populations: an increase in the number of elderly people and a drop in the number of young people, leading to a decrease in demand for goods and services.

The question also arises as to whether alternative energy sources will lower demand for oil, or whether oil-producing countries will be able to improve the quality of their exports by refining them to eliminate carbon dioxide, as many experts have suggested, utilising modern techniques to decarbonise.

However, the greatest challenge for Gulf states remains the need to diversify their economies and the development of modern education systems that will help them develop the knowledge and technology on which advanced economies truly depend.