Horror global recession clue revealed in skyrocketing diesel market

The demand for diesel fuel has long been considered a significant clue regarding the health of the world’s economy, given it is used to power major industries across the planet, including trucking and construction.

But demand for the crucial fuel has been dropping in major economies in recent months, leaving insiders increasingly nervous.

According to S&P Global Inc, demand for diesel in the US is tipped to fall by 2 per cent this year, while Bloomberg reports a marked drop in recent trucking and container port activity in China, and a fall in consumption in Europe as well.

Diesel prices have also fallen across the world along with a decrease in demand, and it coincides with increasingly gloomy predictions for the global economy in the months ahead.

Debnil Chowdhury, S&P head of Americas fuels and refining, said insiders were now “assuming one of the worst economic climates in recent memory outside of the 2008-2009 financial crisis and the pandemic” – and just last week, Australian Treasurer Jim Chalmers said Australia “won’t be completely immune” from the economic fallout to come.

IG Markets analyst Tony Sycamore told news.com.au diesel was a clear indicator of the health of the economy – and things weren’t looking great.

“The fall in the diesel price is a global trend. Here in Sydney the price of diesel has fallen from above $2.30 per litre to under $2.10 per litre, bringing bowser relief to household budgets straining under the cost of living pressures of higher interest rates and higher inflation,” he said.

“That aside, the fall on diesel pries does reflect uncertainty around global economic growth as diesel is the lifeblood of economies, used across transport, construction and heavy industry. “While European growth prospects have improved considerably from this time last year as fears over the energy crisis faded into the end of last year, the recent banking crisis has increased the chances that the US economy does enter recession.”

Mr Sycamore added that the release of the Federal Open Market Committee (FOMC) minutes last week noted that the banking crisis would likely send the US economy into recession starting later this year.

“In China, the reopening has failed to provide the rebound in demand, because China’s demand for diesel is freight transport and industry rather than consumer demand where most of the slack was due to lockdowns,” Mr Sycamore said.

“Additionally Chinese consumers have remained cautious following the reopening. While they are free to travel and spend, consumer confidence remains subdued and they are being very picky about where they spend.

“Overall the decline in diesel prices is an accurate representation of the uncertainty that surrounds the global outlook, with the big question mark hanging over the US and how deep a recession it will have and how long it will be before Chinese consumers feel more confident about the world following their reopening,” he said.

“Diesel demand can act as a leading indicator for broader growth as an early sign that spending by households is waning,” Ben Ayers, a senior US economist with Nationwide Economics, also told Bloomberg.

“An expected drop in diesel demand fits with building recession risks across the economy.”

A major factor in the drop in trucking – and therefore diesel demand – in the US at least, is because households are tightening their belts and cutting back on non-essential spending, which means fewer trucks are needed on the roads to transport goods.

And according to data from the Association of American Railroads reported by Reuters, major US railroads moved 10 per cent fewer shipping containers in the first three months of this year than in the same period in 2022.

It’s a trend that’s only set to continue as more and more people lose their jobs due to the economy weakening further.

It comes as the International Monetary Fund (IMF) warned in its World Economic Outlook update for April last week that the dangers of a downturn had soared for advanced economies as a result of recent US and European bank failures, and dropped its forecast for global output growth by 0.1 per cent.

Australia’s growth is tipped to be 1.6 per cent this year and 1.7 per cent in 2024.

It cautioned that the world economy was “entering a perilous phase during which economic growth remains low by historical standards and financial risks have risen, yet inflation has not yet decisively turned the corner” and that a “hard landing – particularly for advanced economies – has become a much larger risk”.

“With the recent increase in financial market volatility and multiple indicators pointing in different directions, the fog around the world economic outlook has thickened,” the IMF report states.

‘Uncharted waters’

Meanwhile, Finder’s Cost of Living Report 2023 found that petrol prices were one of the top four causes of financial stress among Australian consumers in 2023, tied with energy and just behind housing and grocery costs.

“The percentage of households citing petrol prices as a source of stress has risen sharply from 12 per cent in March 2020 to 27 per cent in March 2021, before falling back slightly to 26 per cent in March 2023,” Finder’s head of consumer research Graham Cooke said.

“This follows a slight drop in prices due to the softening of some international factors inflating cost. One of these factors is a drop in demand – which could be a sign of a slowing down of economic conditions.

“Central banks across the world have been pumping interest rates in order to tackle inflation, which reduces household spending, and in turn reduces demand for goods and services, and the consumption of fuel.”

Mr Cooke said the “small drops in consumption thus far are not necessarily a bad thing” and could be an indication that the rate increases are working to reduce consumer spending.

“What will matter is what happens next. If inflation starts to soften and interest rates can be reduced, consumer spending may start to bounce back,” he said.

“If these things don’t happen and demand continues to decline, however, it could be a sign that the global economy is heading into uncharted waters.”