Baku, Azerbaijan, Dec.3
By Leman Zeynalova - Trend:
A fall in oil prices should be positive for global growth, the UK-based Capital Economics consulting company believes.
“This is because it transfers income from oil-producing economies (which have high marginal savings rates) to oil-consuming economies (which have low marginal savings rates). So, on the face of it, the drop in oil over the past few weeks should be a welcome development amid a flurry of otherwise gloomy news,” said Neil Shearing, Group Chief Economist.
However, he believes that the economic theory comes with two important caveats in practice.
“The first relates to timing. When oil prices fall, the losses are concentrated in a small number of oil producing economies but the benefits are dispersed over a large number of oil consuming economies. The drag on activity in the former may be felt relatively quickly, as energy firms mothball investment projects and governments and consumers are forced to tighten their belts. In contrast, the boost to activity in the latter can take longer to materialize since consumers may need to be persuaded that lower prices aren’t a flash in the pan before adjusting their behaviour,” said Shearing,
He pointed out that the second caveat is that, while lower oil prices should ultimately be beneficial for world growth, this is typically swamped by other things. I
“In particular, a drop in oil prices is often driven by more fundamental concerns about the health of the global economy. By shifting income from savers to spenders, the fall in prices acts as a form of automatic stabilizer that helps to cushion any slowdown in world growth,” said the chief economist.
But past form suggests that this doesn’t tend to prevent it from weakening altogether in the short-term, he said, adding that indeed, drops in oil prices typically coincide with slowdowns in the global economy.
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