| Click for the Finfacts Ireland Portal Homepage |

Finfacts Business News Centre

Home 
 
 News
 Irish
 Irish Economy
 EU Economy
 US Economy
 UK Economy
 Global Economy
 International
 Property
 Innovation
 
 Analysis/Comment
 
 Asia Economy


Finfacts changes from 2015

RSS FEED


How to use our RSS feed

Follow Finfacts on Twitter

 
Web Finfacts

See Search Box lower down this column for searches of Finfacts news pages. Where there may be the odd special character missing from an older page, it's a problem that developed when Interactive Tools upgraded to a new content management system.

Welcome

Finfacts is Ireland's leading business information site and you are in its business news section.

Links

Finfacts Homepage

Irish Share Prices

Euribor Daily Rates

Global Cost of Living

Irish Tax - Income/Corporate

 

Feedback

 

Content Management by interactivetools.com.

News : Global Economy Last Updated: Jan 6, 2015 - 3:09 AM


Global GDP boost from low oil prices in 2015 at 0.1%
By Michael Hennigan, Finfacts founder and editor
Jan 2, 2015 - 4:39 AM

Email this article
 Printer friendly page

On Wednesday the year ended with welcome news for global oil consumers as The Wall Street Journal reported that oil futures closed at more-than five-year lows, with plentiful supplies and tepid demand continuing to send prices plunging. Brent crude oil and gasoline futures both posted 48% losses in 2014, making them the worst performers among the 22 commodity markets tracked by the Bloomberg Commodity Index while US oil futures dropped 46% in the year. The Economist Intelligence Unit (EIU) expects a small boost to global GDP growth in 2015 from lower energy prices with an increase  expected to be just 0.1 of a percentage point, hindered by serious weakness in key economies, particularly the  Eurozone and Japan.

Deutsche Bank expects the average price of Brent crude in 2015 to be $72.50 per barrel - the global oil benchmark was as high as $112 in June 2014. Brent for February delivery is at $57.71 this morning.

Stefan Schneider, Deutsche Bank Research economist, says that the transfer of income to oil importers should lead relatively directly to spending increases there, while in the majority of oil-exporting countries the decline in income should only gradually be reflected in lower expenditure. "According to conventional rules of thumb this should boost global growth by about ½ percentage point. However, it should be noted that on account of the extremely low interest rate level in the advanced economies the decline in interest rates that usually accompanies falling oil prices and inflation rates will probably not take place on this occasion. In addition, the 1,500 or so shale oil production facilities in the US have led to an increase in the price elasticity of oil supply. The generally positive effects of the low oil prices will probably help global economic growth to average 3.6% in 2015 – a slight pick-up from 3.2% in 2014."

Real GDP growth overall is thus likely to accelerate to 3.5% compared with 2.4% in 2014. Moreover, the renewed decline in the inflation rate to just 1.3% in November allows the Fed to continue to wait and see concerning its first rate post-crisis hike.

Deutsche Bank says that while the decline in petrol prices by one dollar per gallon in the US is regarded has been regarded as an early Christmas present, the drop in the oil price in Europe is almost seen as a punishment. The inflation rate is likely to be negative in the coming months, at least temporarily, and thus make it even more difficult for the European Central Bank (ECB) to prevent a slide in medium-term inflation expectations. This could then exacerbate the deleveraging process in the Eurozone due to concerns about a real increase in the debt load, with the correspondingly negative impact on growth.

"All the same, no-one expects the free fall in the oil price to continue for years. On the contrary, the overwhelming majority of forecasts assume the price will rise in the course of 2015, which would reverse the effect on the inflation rate. Moreover, the financial crisis triggered by the US subprime disaster should have made it patently clear to us how limited the robustness is of such 'implicit' forecasts made by the financial markets. Does the exception prove the rule? Not at all. At the start of 2014 an oil price of nearly $106 per barrel was forecast for early 2015 (the lowest forecast was $90!). Moreover, the drop in the inflation rate in contrast to Fisher's famous debt/deflation theory probably has a more positive effect on debt sustainability, given that the price decline is not a result of falling wages or selling prices, but of declining input prices, which boost the real value of income and earnings and thus ease the debt service load in the private sector. That households in this environment hold back with their spending in the hope that prices continue to fall is probably also most unlikely. Since a significant share of public spending is geared towards living costs while energy taxes in Europe are mostly per unit taxes, one could presume a positive effect even on the public purse."

The EIU says that in the Eurozone, lower oil prices will provide a modest lift to consumption, but the ECB is worried that this could push inflation expectations down further, increasing the risk of a debt deflation cycle. The ECB is expected to announce a quantitative easing/ sovereign bond purchase programme after its policy meeting on January 22.

Russia, already hit by Western sanctions, will be one of the big losers from lower oil prices. All countries heavily dependent on oil for fiscal or export revenue will also feel the financial repercussions. Among the major oil exporters, Venezuela is most exposed to payment problems, having failed to save sufficiently when prices were high.

In Japan, its central bank’s round of monetary stimulus in October helped currency to fall and the stockmarket to rise and so the EIU expects GDP to have risen in the fourth quarter.

Mike Jakeman, global analyst at The Economist Intelligence Unit said before Christmas: “Plunging oil prices have triggered a new wave of uncertainty in the global economy. We expect the global economy to receive a boosted from the current price rout, but not by as much as might have been expected. The IMF estimates that a 10% decline in the global price of oil will add about 0.2 percentage points to world GDP after about one year. Yet that presumes that most countries are growing at something close to normal rates, which means that consumers and businesses would spend a reasonable portion of the savings from lower fuel prices, boosting GDP. The gain to growth would be smaller in countries that are deleveraging and suffering economically: in this case, consumers would be inclined to save more of their windfall or to use it to pay down debt. We think this is the case in the EU and in Japan, which means we are raising our forecast for global GDP growth in 2015 by just 0.1 percentage point, to 2.9%, at market exchange rates.”

US economy out of step with rest of the world: As Japan and the Eurozone introduce new plans to keep their economies afloat, the US central bank is preparing to raise interest rates. As Brazil and Russia edge near recession and China struggles to purge huge debt, the US is growing rapidly and creating jobs at the fastest pace in 15 years. Employers have created more than 200,000 jobs in each of the last ten months and the number of Americans applying for unemployment benefits is at pre-recession lows.

China and oil: The EIU has also raised its 2015 GDP growth forecast for China to 7.1% on the back of the decline in oil prices. India and South Korea will also benefit. Additionally, despite concerns over a slowdown in China, the country remains the global standard. GDP in the first half of the year was around 60% higher than before the global recession started, by far the biggest increase of any economy.

Europe is holding back the global recovery: The EIU says that Europe remains the greatest drag on global growth with many countries failing to see output reach the pre-recession level. This includes Italy, Spain, Netherlands and Ireland. The Russia-Ukraine crisis has badly damaged investor sentiment in northern Europe, which has drained some of the life out of the Germany economy. "EU sanctions on Russia are disproportionately affecting Germany’s economy, felt via the trade channel in higher-end capital goods in the defence and oil sectors that are banned under the sanctions."

International Energy Agency and clean energy

Maria van der Hoeven, executive director, of the International Energy Agency, the Paris-based watchdog for 28 industrialised countries including Ireland, wrote last month in a blog post:

Some observers are likening this era to the bear market in oil that began in the mid-1980s. Back then, policy makers in certain countries could have taken advantage of the plunge in oil prices to tighten vehicle fuel-efficiency standards, which would have protected motorists from the inevitable run-up in prices. But instead they generally took a laissez-faire approach, and consumers flocked to larger, thirstier vehicles. When oil prices began rising, owners of those vehicles paid dearly at the pump.

What a difference a protracted spell of high prices makes. Formerly a laggard, the United States raised fuel efficiency standards for new light-duty vehicles by more than 14% between 2008 and 2013; standards will be tightened further in the years to come, reducing US dependence on oil by 2m barrels a day by 2025, according to the US government. This will improve US energy security and curb emissions of the greenhouse gases that are causing the planet to warm. And if past experience offers any lessons, now is not the time to ease up -- especially given the pressing need to transform our planet's energy system.

With its heavy reliance on fossil fuels, the current system is on course to deliver at least a 4-degree Celsius increase in global temperatures if no changes are made. It is no secret that we need radical action, but efforts thus far have been sluggish at best. In the International Energy Agency's annual assessment of efforts to transform the energy system, renewables represent the only bright spot in an otherwise-bleak picture of clean-energy progress."

Global trade structurally weaker

Stefan Schneider, Deutsche Bank has also commented on the impact of structural shift in trade

Schneider says that despite a further softening of the euro during 2015Eurozone exports are expected to rise by just 3 ½% in 2015 and net exports are not expected to contribute to the modest GDP growth of 1.0%.

This is also because the catching-up process for the emerging markets triggered by their integration in the global economy – a major driver of global trade in the last two decades – has slowed markedly of late. The establishment of global value chains also seems to have slowed down significantly. Moreover, since the economic and financial crisis the global integration of financial markets has more or less come to a standstill. It therefore does not look as if global trade will again grow at nearly twice the speed of global GDP in the next few years, as was the case in the past. Considerable adjustment burdens thus lie ahead for Germany because of its strong export focus. Therefore, German economic growth at 1.0% is likely to match the Eurozone average and Germany is set to lose its preeminent position. So positive wishes for the New Year are likely to be most appropriate."

Related Articles


© Copyright 2015 by Finfacts.ie

Top of Page

Global Economy
Latest Headlines
Strong Swiss franc gloom deepens for exporters
Global investors shift focus to China; EM outflows surge to $1tn in 13 months
Global oil glut will continue into 2016
Stable growth momentum in OECD area but slowing expected in China
Prices for major food commodities in July lowest since September 2009
Global manufacturing in July weakest level in two years
US, China and UK lead top 25 target countries for foreign direct investment
Budget surpluses rare in developed countries from 1980s; Italy, France, Greece had none in 60 and 40 years
Singapore, London and Shanghai top cities for new FDI projects in 2014; Dublin in 11th place
Exchange rates shuffle as Dublin ranked 49th most expensive city; Paris at 46; Berlin at 105
Western consumer groups under pressure in China and India
Developing countries facing “structural slowdown” likely to last for years
OECD BEPS Tax Project: Amazon books UK sales in UK; Australia proposes up to 100% in penalties
Emerging Markets Index falls to 12-month low in May as manufacturing contracts
US and world economies slowing in 2015 — OECD
Global manufacturing production rose slightly in May; Trade flows weak
GDP growth in OECD area slowed to 0.3% in the first quarter of 2015
Only one quarter of workers worldwide have stable employment contracts
Automatic Exchange of Tax Information: OECD says countries won't be able to game system
Gates Foundation loses in Swiss family's shares coup
Minimum wage levels in OECD countries
Brent oil benchmark over $68 a barrel - up almost 50% in 2015
Global growth slows and manufacturing dips to 21-month low
Family-controlled firms dominate European business
Top 10 of world’s 250 largest consumer products companies account for 30% of sales
Nine of world's 20 fastest growing economies in Africa
Globalisation maybe stalling as trade growth remains weak
Global growth prospects uneven across major economies says IMF
Emerging markets growth lowest since 2009; Global growth at 30-year average
China's economic rebalancing hitting Latin American economies
New York, London, HK & Singapore top global financial centres index; Dublin recovers
Global growth in modest expansion from low oil prices/ monetary easing says OECD
Composite leading indicators point to positive change in growth momentum in the Eurozone
Global labour market trends portend paradise for some but uncertainty for many workers
Vienna remains top of World Quality of Living Rankings in 2015; Dublin at 34
Zurich and Geneva overtake Singapore to become world's most expensive cities
HSBC Switzerland and Falciani: How it happened
Global economic power to continue shift from advanced economies
Global food price index falls in January; Cereal output set for record
Global debt has risen $57tn or 17% of world GDP since 2007