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:
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%.
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