Vicious cycle of austerity and unemployment

Updated 05 June 2013
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Vicious cycle of austerity and unemployment

Weak growth and rising unemployment in the euro zone is prompting a change in policy direction away from budget austerity, according to QNB Group. The euro zone economy has now been in recession for the last six quarters, contracting by 1.5 percent in real terms over this period. The contracting economy is providing fewer opportunities for job creation and pushing up unemployment, which reached 12.1 percent of the labour force in March 2013. Amongst under-25s, joblessness is even higher at 24 percent. Both measures of unemployment are now the highest on record.
A primary policy response to the 2008 financial crisis and the European sovereign debt crisis (which reached peak intensity in summer 2012) was to implement budget austerity measures across the euro zone. This involved a sharp drop in public expenditure growth, which fell from an annual average of 4.5 percent in 2007-09 to 1.2 percent in 2010-12. This meant that only 170 billion euros was added to euro zone budgets in 2010-12 compared with 570 billion euros in 2007-09, an overall slowdown of 400 billion euros.
The main areas targeted by governments to slow expenditure growth have been social benefits, public sector jobs and wages, and capital investment. Cutting government jobs and investment has a direct impact on growth and unemployment. Meanwhile, reducing social benefits at a time of hardship is leading to widespread dissatisfaction and protests. The high levels of sovereign debt in Europe have discouraged the counter-cyclical spending that government usually uses to rebalance their economies during recessions. Debt interest and capital repayments, which are not supportive of growth, were the only areas with higher growth in 2010-12 than in 2007-09.
Therefore, euro zone countries policy response has done little to tackle the unprecedented level of unemployment and weak growth, according to QNB Group. Officials increasingly appear to be considering a policy reversal. The target dates for reducing budget deficits below certain thresholds have already been pushed back in France, Spain and the Netherlands. In April, the president of the European Commission, José Barroso, said that Europe might have reached the politically acceptable limits of austerity, although he said he still believed cuts in budget deficits were needed. His comments were more in line with the view of the IMF, which has warned euro zone policy makers against adhering too strictly to budget deficit targets as this risks deepening Europe’s recession.
Budget deficits have fallen from 6.4 percent of GDP in 2009 to 3.7 percent in 2012. Government debt in the Eurozone has now risen from 80 percent of GDP in 2009 to 91 percent in 2012. Although debt levels are rising, there may still be room for manoeuvre. Increased debt-funded spending in growth-supportive areas, such as investment or intermediate consumption could potentially increase revenue and trigger further investment, helping to reduce debt in the longer term.

Heavily-indebted countries have, in the past, increased spending and exhibited strong growth as a means to repaying debt. The US and the UK in the 1950s both had debt in excess of 100 percent but high spending drove strong growth and enabled them to reduce debt to sustainable levels.
Reduced austerity in some of the larger countries could also help tackle unemployment across the region, especially if coupled with reforms to increase labour force mobility around the EU.
However, the overall debt levels in the Eurozone cloud a more nuanced picture among individual countries as both unemployment and debt vary considerably. Unemployment in non-core euro zone countries (Italy, Spain, Greece, Ireland, Portugal Cyprus, Estonia, Slovakia and Slovenia) is 17.7 percent while unemployment in core countries (Germany, France, Austria, Belgium, Finland, Luxembourg, Malta and Netherlands) is 7.6 percent.
Greece, Italy, Portugal and Ireland, each have debt levels of around 120 percent of GDP or greater, leaving them with little room to ease back on austerity. Greece is in the worst position with unemployment at 27 percent and 66 percent for under-25s while debt is 157 percent of GDP (although it is falling). Conversely, Spain, the other country with particularly chronic unemployment (27 percent and 56 percent among under-25s), may have room to borrow more to provide additional government support to the economy.
In addition to more growth focused policies, QNB Group argues that structural labour market reforms are still required. Investment in programs to get people back to work, adjustments in labor costs and greater labor market flexibility should all help. These policies are most needed in countries with high unemployment, such as Greece and Spain.


Asia’s refining profits slump as Mideast exports surge

Updated 23 February 2019
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Asia’s refining profits slump as Mideast exports surge

  • Since 2006, the Asia-Pacific has been the world’s biggest oil-consuming region, led by industrial users South Korea and Japan along with rising powerhouses China and India
  • However, overbuilding of refineries and sluggish demand growth have caused a jump in fuel exports from these demand hubs

SINGAPORE: Asia’s biggest oil consumers are flooding the region with fuel as refining output is exceeding consumption amid a slowdown in demand growth, pressuring industry profits.
Since 2006, the Asia-Pacific has been the world’s biggest oil-consuming region, led by industrial users South Korea and Japan along with rising powerhouses China and India.
Yet overbuilding of refineries and sluggish demand growth have caused a jump in fuel exports from these demand hubs.
Compounding the supply overhang, fuel exports from the Middle East, which BP data shows added more than 1 million barrels per day (bpd) of refining capacity from 2013 to 2017, have doubled since 2014 to around 55 million tons, according to Refinitiv.
Car sales in China, the world’s second-biggest oil user, fell for the first time on record last year, and early 2019 sales also remain weak, suggesting a slowdown in gasoline demand.
For diesel, China National Petroleum Corp. in January said that it expected demand to fall by 1.1 percent in 2019. That would be China’s first annual demand decline for a major fuel since its industrial ascent started in 1990.
The surge in fuel exports combined with a 25 percent jump in crude oil prices so far this year has collapsed Singapore refinery margins, the Asian benchmark, from more than $11 per barrel in mid-2017 to just over $2.
Combine the slumping margins with labor costs and taxes and many Asian refineries now struggle to make money.
The squeezed margins have pummelled the stocks of most major Asian petroleum companies, such as Japan’s refiners JXTG Holdings Inc. or Idemitsu Kosan, South Korea’s top oil processor SK Innovation, Asia’s top oil refiner China Petroleum & Chemical Corp. and Indian Oil Corp., with some companies dropping by about 40 percent over the past year. Jeff Brown, president of energy consultancy FGE, said the surge in exports and resulting oversupply were a “big problem” for the industry.
“The pressure on refinery margins is a case of death by a thousand cuts ... Refinery upgrades throughout the region are bumping up against softening demand growth,” he said.
The profit slump follows a surge in fuel exports from China, India, Japan, South Korea and Taiwan. Refinitiv shipping data shows fuel exports from those countries have risen threefold since 2014, to a record of around 15 million tons in January.
The biggest jump in exports has come from China, where refiners are selling off record amounts of excess fuel into Asia.
“There is a risk for Asian market turmoil if (China’s fuel) export capacity remains at the current level or grows further,” said Noriaki Sakai, chief executive officer at Idemitsu Kosan during a news conference last week.
But Japanese and South Korean fuel exports have also risen as demand at home falls amid mature industry and a shrinking population. Japan’s 2019 oil demand will drop by 0.1 percent from 2018, while South Korea’s will remain flat, according to forecasts from Energy Aspects.
In Japan, oil imports have been falling steadily for years, yet its refiners produce more fuel than its industry can absorb. The situation is similar in South Korea, the world’s fifth-biggest refiner by capacity, according to data from BP.
Cho Sang-bum, an official at the Korea Petroleum Association, which represents South Korean refiners, said the surging exports had “triggered a gasoline glut.”
That glut caused negative gasoline margins in January.