The tumbling oil price is a warning of turbulent times in the world economy

Brent crude’s fall lifts the pressure on central banks to curb inflation. But it also reflects a decline in economic optimism

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After six weeks of falling, the oil price came to a pause last week. In the global ranking of economic events, a 20%-plus drop in the price of the black stuff is a big deal. A barrel of Brent crude cost $86 at the beginning of October. Last week the cost of a barrel fell to just $66 before settling at $67.

Of course, the Brent price is only back to where it was in March, and remains well above the low of $28 it hit in early 2016. Yet such a dramatic fall will force America’s central bank to rip up its forecasts for inflation and reconsider some of its planned interest rate rises.

And if fuel costs are not rising and the Federal Reserve is no longer pushing for higher rates, the pressure will be off the Bank of England, the European Central Bank and the Bank of Japan to follow suit.

Fewer interest rate rises over the next two to three years will bring down projected borrowing costs, triggering a collective and almost audible sigh of relief from the growing number of indebted companies and consumers across the globe.

It’s even possible that a sense of balance in the global economy will be restored. That would be the case if the oil price rise were unconnected to broader trends that have doom written all over them. Unfortunately, it is very much connected.

Last year, Brent recovered following a deal among Opec members and Russia to restrict supply. This year it carried on rising after the US president said he would blockade Iran, restricting supplies further. Both these events were played out against a backdrop of rising global trade and GDP growth. Predictions by the International Monetary Fund and other forecasters were benign.

In the last few months, that narrative has changed. China has begun to slow down dramatically. Germany’s economy has gone into reverse. Without Beijing to drive the Asian economies and Germany to spur its neighbours, the US is starting to look a little wobbly.

Washington can still boast a stellar GDP growth rate following the sugar rush of tax cuts and spending that Donald Trump injected into the US economy. The property market, which was the source of the last crash, is robust, according to a combination of various housing data.

However, there are plenty of figures that signal a hangover is looming. New and existing US home sales have dropped in every month since June, and in the last week of October mortgage applications for buying a home hit a two-year low.

As an indication of consumer confidence, mortgage applications are among the most closely watched statistics. Economists can see that wages have outstripped inflation for some time in the US and yet consumers are shying away from making the biggest purchases.

Add into the mix an escalation in trade protectionism, led by Trump, and you have a recipe for lower global growth.

The IMF has heavily revised its global forecasts in light of these developments and warned about the negative prospects for the American economy beyond next year.

No wonder the rise in oil prices has started to reverse. A slowdown in China followed by the US deprives the global economy of its two biggest engines. If the world economy is akin to an airliner, those two engines are not just necessary for lift-off – they are needed to keep the plane in the air.

Does that mean a crash is imminent? Not yet. There is still enough momentum to keep investors from fleeing the scene and sending markets plummeting. That said, the turbulence could soon be unsettling.

EU’s shock power ruling is a chance to ditch polluters

The timing of two bits of EU news last week was extraordinary. On the day the government was in meltdown over its Brexit deal, the EU’s highest court ruled that the UK’s key backup power plan, the capacity market scheme, was illegal under state aid rules.

The shock judgment left UK government officials and energy executives dumbfounded, with the suspension of the capacity market raising concerns about whether the lights would stay on this winter.

While National Grid, government and analysts insist supplies are not at risk in the coming months, the decision has raised a host of questions. One of the biggest is how long this “standstill period” of the capacity market will last. Ministers are talking to the European commission about getting state aid approval back in place. But there is a real possibility the suspension could last into next winter.

Until a rejigged market gets the green light, none of the scheme’s £1bn-a-year payments can be made to electricity generators for providing power at crunch times.

Power station operators do not know whether payments will be deferred or simply lost. Worse still for the operators is the possibility of the UK having to take steps to recoup previous payments. The best government can say now is it “hopes that this can be avoided”.

Electricity supplies may not be at risk this winter, but this could change if energy firms delay building new power plants whose business models were predicated on capacity market agreements.

Business secretary Greg Clark told the Observer he was committed to the capacity market in the short term. But he should not return to the status quo: this is a chance to redesign the market away from gas and coal and towards the cleaner and smarter technologies that prompted the legal challenge in the first place.

FirstGroup wants rail franchises to be a licence to print money

Those considering whether the rail franchising system should survive will be following with interest moves by FirstGroup to renegotiate the terms of its £2.6bn South Western contract. The echoes of Virgin Trains East Coast are faint so far, but ominous nonetheless for the Department for Transport. Barely a year into a high-revenue franchise, the operator has signalled that it is paying too much.

FirstGroup says “discussions” will focus on a mechanism to limit its exposure to financial risk: should passenger numbers fall in line with the central London employment index, First’s liabilities to the government would also fall. But the capital’s job numbers have held up, while customers have drifted away.

With magnificent chutzpah, FirstGroup declares that this shows the risk-reward mechanism is malfunctioning. But South Western passengers have no trouble reeling off reasons why they might simply choose to avoid the train. Not all of them are FirstGroup’s fault: it inherited a creaking network, as well as a bitter industrial row over the future of guards on trains. FirstGroup, though, appears to be implying that mechanisms to limit risk should have eradicated the revenue downside altogether.

That is not the model that the DfT’s crack franchising team drew up, or that FirstGroup bid for. However, it is no surprise that FirstGroup is trying its luck, given how desperately transport secretary Chris Grayling tried to keep Stagecoach-Virgin’s operation afloat, before being forced to renationalise the east coast route.

Even Grayling now says franchising in its current form is bust. Those who espouse more radical remedies will be watching FirstGroup closely. Its South Western woes are balanced by the handsome profits it reaps from the neighbouring Great Western line, on a contract awarded without competition, even as services founder and passengers despair. As yet, First is not negotiating to hand back those gains.

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