“Economic malaise” became the phrase of choice in 2011 for forecasters, and not just when describing the U.S. economy. Troubles in the Eurozone have impacted growth prospects for even the strongest economies in the region (see here, here, and here for more), as debt concerns and austerity measures in the peripheral countries of Greece, Italy and Portugal hamper any and all hope for growth for the region.As a result, demand for goods is expected to be lower within the European market. As German exports typically find their home in the peripheral countries of Europe, German factories are slashing expectations on their lines. The impact of this has reverberated in 2011 through to commodities and wreaked havoc with European power and carbon prices.
As the demand fundamentals for the underlying fuel sources of power generation experience weakness, we have witnessed little support for power prices themselves. However, power has the benefit of being a necessity, even when times are tough. While turning the lights off to save energy becomes somewhat prevalent as a money saver, the reality is that there will always be some need to keep lights switched on.
As for the European carbon market through 2011, it under-performed at just about every turn. While the decision to shutter Germany’s nuclear facilities gave some support to carbon prices at the beginning of 2011, the Eurozone debt crisis took center stage in directing carbon permits. While the industrial sector is not the largest emitter of greenhouse gases, it is a very large demand sector of the number one greenhouse gas culprit: power generators. So when industrial production expectations are slashed, there is a reflective downward adjustment to the demand for permits, not just from the industrial sector but from the power-generation sector as well.
This gives us a double downward whammy scenario for carbon permit demand. Concerns of oversupply have compounded this issue. Credits for the European Union’s next phase of the emissions-cutting program are beginning to hit the market at a time when demand shows little sign of improvement.
It is likely we will see this malaise extend into the new year and continue for quite some time. And while the U.S. is faring somewhat better than Europe, the country is by no means out of the woods yet. The labor market recently has experienced some improvement, but the overall unemployment rate remains elevated and the housing sector (a large source of asset creation) remains depressed.
Without a solid resolution on the crisis in the Eurozone and a reduction in the U.S. unemployment rate, both economic sentiment and economic growth will remain in the doldrums – keeping demand for goods and services at bay.