How will lower oil prices affect global economy?

How will lower oil prices affect global economy?

BAKU, Azerbaijan, March 10

By Leman Zeynalova – Trend:

While falling oil prices have historically been deemed a net positive for global demand, there are several reasons to think that the latest slump will only add to the immediate headwinds facing the world economy, Trend reports with reference to UK-based Capital Economics research and consulting company.

The company recalls that in the past, economists have argued that falling oil prices would tend to boost global growth in two ways. “First, they transfer income from net oil producers, which have had high savings rates, to net oil consumers, which are typically high-spending advanced economies. Second, they lower costs for non-energy firms, supporting investment to increase production. But the world economy has changed and the effects of the 73 percent drop in oil prices in 2014/15 indicated that falling oil prices are not necessarily positive.”

Starting with the possible benefits, the near-50 percent drop in the oil price since the start of the year to $35pb will knock about 1ppt off headline OECD inflation, thereby boosting consumers’ purchasing power, according to the report of Capital Economics.

“But households seem to have become less sensitive to changes in oil prices, at least partly because faith in central banks has made inflation expectations less responsive to price shocks. And since coronavirus fears are limiting discretionary spending and even causing lay-offs in some countries, it seems particularly unlikely that households will respond to lower energy costs by spending more now.”

The costs will accrue mainly to the major oil exporters, which generally still run current account surpluses in contrast to the deficits of oil importers, said the company.

“To an extent, they will be able to run down their savings in response to lower oil prices rather than cutting spending. But their surpluses are not as large as they once were and prolonged weakness in oil prices could cause spending to fall. Even now, governments in Russia and Saudi Arabia are set to provide less support than we had previously assumed.”

Producers in developing markets (DMs) will also suffer, the company believes.

“Investment in Canadian oil sands is likely to weaken, along with that in US shale. Indeed, the notion that the US is a large net oil importer is outdated,” said the report. “The upshot is that the drop in oil prices has not caused us to change our forecast of a slowdown in global GDP growth to 2 percent this year. If anything, it has raised the threat of a deeper downturn.”

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Follow the author on Twitter: @Lyaman_Zeyn

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