Global Economic Recovery and Oil Markets in Context

Dean Foreman
Posted August 26, 2020

The 2020 global economic recession, triggered by the COVID-19 pandemic and government responses to it, is the deepest since World War II. Yet the World Bank, along with the Bloomberg consensus, expect global GDP growth to rebound in 2021.   

It appears $15 trillion of global stimulus is likely to have a positive impact on economic growth – and, with enabling infrastructure, markets and policies, could become a source of optimism for global oil markets.  

Historically, global GDP growth and increased oil demand have gone together – once there’s impetus for growth there must be energy to fuel that growth:

As oil markets have evolved along with global financial markets, the economic recessions in 2008-2009 and 2020 to date corresponded with large oil price decreases, reflecting lower demand as well as oil’s value as a financial instrument.

Now, central banks are actively performing triage on the global economy – an estimated $15 trillion of stimulus so far – or the equivalent to about 17% of the $87 trillion global economy in 2019 per Reuters. This includes central bank asset purchases already made, new government cash injections and spending pledges, plus about $7 trillion of quasi-fiscal loan and credit guarantees. Separately, nearly all developed economies have reduced their policy interest rates to zero or near it.

Let’s turn next to the global economic outlook and path through 2021 expected by the Bloomberg consensus and World Bank.

Based on estimates through July, the Bloomberg consensus projects the global economy to contract by 4.0% in 2020 and rebound by 4.4% in 2021. 

This would amount to a one-year recession, followed by recovery that numerically could raise global GDP in 2021 above its record 2019 level. Significant uncertainty remains about the recovery path, however, with the consensus seeing more downside than upside risk if measures persist to combat the spread of COVID-19.

Additionally, the World Bank compares the annual paths before and after economic recessions in 1975, 1982, 1995, 2009 and as presently expected. 

Although the Great Financial Crisis of 2008-2099 destroyed more economic value than each of the previous three recessions, the 2020 COVID-19 recession has already surpassed it and carved out the steepest downturn yet. Like the Bloomberg consensus, World Bank projects a recovery paced off the Great Financial Crisis.

For global oil consumption, the 2020 COVID-19 recession has had a far larger impact than previous recessions. World Bank expects global oil consumption in 2020 to fall by 8.6%, year over year (y/y). By comparison the U.S. Energy Information Administration (EIA) currently projects an 8.1% y/y decrease this year, followed by a rebound of 7.5% y/y next year.

Consequently, while the economy could surpass its previous high value by 2021, World Bank and U.S. Energy Information Administration expect global oil demand will only reach 2018 levels by next year.