Downturn

There is a reason why oil prices have come down: people are expecting a global economic downturn.

When global economic growth slows, demand for fuel declines. This puts downward pressure on the price of oil.

With a lower oil price regime, oil exporters will want to sell more oil to meet their own funding needs. OPEC is expected to hike production next month. This will feed into the downward trajectory of fuel prices.

The Trump II administration is pursuing a cheap energy policy by encouraging more production of fossil fuels. US energy officials are looking to bring down oil prices to between $50 and $60 per barrel. Currently, West Texas oil is selling in the high 60s per barrel.

Prospects for further softening of oil prices will help reduce inflation levels. Lower inflation, however, does not automatically translate into higher growth. The more pessimistic analysts are forecasting a period of “stagflation.”

Some big banks are predicting a bout of recession for the US economy. Should this happen, the rest of the global economy will inevitably be dragged down. You have heard that aphorism: when the US sneezes, the rest of the world catches the cold.

Months ago, legendary investor Warren Buffett began selling down stocks, accumulating a huge cash stockpile. With the cash, he invested in fixed income securities.

Over the last two weeks, the US stock market suffered sharp declines. Tesla’s market capital, for instance, is estimated to have lost $800 billion because of the drop in stock prices. More people now understand why the 93-year-old Buffett has become such a wealthy man. He consistently reads market trends correctly.

The sharp drop in stock prices on the US stock exchange reverberated globally. Over the past two weeks, trillions of dollars in market capital evaporated as other stock exchanges reflected the price drops in New York.

Erratic stock price movements in the US market is generally attributed to Donald Trump’s disposition to impose more and more tariffs on goods entering the American economy. The US President operates on some quaint 19th century economic orthodoxy that believes raising tariff walls will help a country industrialize. Few other nations hold such orthodoxy in this age. Instead, they build economic growth by encouraging innovation and improving on efficiency.

Trump and the “America First” movement constantly rail against “globalization” – blaming increase in economic integration for the perceptible decline in American industries. They peddle some bizarre conspiracy theory – like Filipino leftists do – that a cabal of “globalists” is responsible for undermining America’s economic strength and diminishing her industrial prowess.

There is a more sober reason for why “globalization” happened. It simply makes better business sense to manufacture things where they are cheapest and trade on the basis of comparative advantages. It makes no strategic sense at all to try and build industries by restricting international trade.

But Donald Trump is insistent on the obsolete economic orthodoxy he holds. But by building a tariff wall around the American economy, he will force American consumers to pay more for nearly everything they need – whether this be avocados from Mexico or aluminum from Canada.

Until Trump realizes that tariffs are a penalty on American consumers, he will continue on with his erratic bluster and distress his own domestic market. US stocks will continue on its rollercoaster ride and markets everywhere will be afflicted with high uncertainty.

Free trade encourages the most efficient allocation of capital. When trade is restricted by political whim, such as the wild imposition of tariffs, the allocation of capital becomes less efficient. The current episode defined by Trump’s whimsical tariff impositions will take a strategic toll on global economic development.

All the anxiety sweeping global markets today will produce sub-optimal outcomes for all economies. It will force capital to be allocated to areas where they are less efficient. It will distort all markets eventually as Trump’s tariffs will be met with reciprocal measures by America’s major trading partners.

Trumpism will harm what is left of America’s industrial base. At least two countries, for instance, are seriously reviewing their orders for US-made fighter planes, given the unpredictability of American policies.

The uncertainty plaguing international markets today will constitute “headwinds” to the Philippines’ own economic performance.

It is a wonder that some of our economic planners are so optimistic this year’s growth will exceed the past year’s. Our two most reliable sources of foreign exchange – the BPO industry and labor exports – will come under pressure. Employment in the BPO sector, for instance, will take a hit from wider use of artificial intelligence in backroom business operations.

The massive inflow of foreign investments promised us at the start of the present administration has not materialized. Our agriculture is failing at such a rate that we should be panicking. Population growth outpaces food production. We are now importing every food item we need. No dramatic initiative to save our agricultural productivity is in sight.

Our industrial base has not enlarged in any significant way. Our growth is consumption-led, which explains why the retail and service sectors outpace other areas of the economy.

Much of the economic growth we experienced the past few years was due largely to our recovery from the pandemic: rebuilding supply lines and logistics. The rest of our region has recovered from the pandemic. We have not.