Fall in oil prices: good or bad for global economy?

Oil&Gas Materials 28 November 2018 11:59 (UTC +04:00)

Baku, Azerbaijan, Nov. 28

By Leman Zeynalova - Trend:

The recent fall in oil prices should give a small boost to global economic activity in the coming year or so, the UK-based Capital Economics believes.

The company expects that households will benefit from reduced inflation while any offsetting reduction in mining investment, and tightening of fiscal policy in emerging markets’ oil producers, should be very small.

“The recent fall has certainly been unusually sharp: Brent crude has dropped by around 30 percent from $86 per barrel on 3rd October to $60 per barrel today. Our forecast is for prices to end 2019 around their current level, before dropping to $55 per barrel by end-2020,” said a report from the UK-based company.

A fall in oil prices is generally thought to be positive for global growth because it transfers resources from net oil producers (which have high marginal savings rates) to net oil consumers (which have low marginal savings rates), according to Capital Economics.

However, the company believes that the much bigger fall in oil prices in 2014- 2016, from a peak of $115 per barrel to a low of $29 per barrel, confounded these expectations as global GDP growth actually slowed in the following two years , albeit largely due to a downturn in China.

“Oil prices should provide a boost to household spending over the next year or two. Based on our oil price forecasts, US households will be spending around $40 billion less on gasoline next year. There may well be a similar impact elsewhere. We doubt that the fall in oil prices will have any impact on monetary policy.”

Finally, the pace of the fall in oil prices is not likely to have any major balance sheet effects, comparable to the effect of currency movements, said the company.

But along with falling equity prices and rising credit spreads, the slump in oil is a sign that investors are coming round to our view that global growth is set to slow, according to Capital Economics.


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