Has oil lost the capacity to shock? The oil price decline is, at least in part, a symptom of a broader disinflationary undercurrent caused by lacklustre global demand. This is not purely the exogenous shot in the arm that many hope for.
We need to be very cautious about making comparisons with the oil price decline in the 1980s. First, because of efficiency improvements, overall growth and consumption are a lot less energy intensive than they used to be. Oil price declines do not free up costs for business and households in the same way they did in the 1980s.
Second, previous oil shocks coincided with large cuts in interest rates. We expect many parts of the emerging world to reduce interest rates over the coming year but with many parts of the developed world at the effective zero bound, additional reductions in borrowing costs – and, by implication, support for risky assets – won’t be as effective this time around.
While it does not dramatically alter the picture for overall global growth, there are certainly relative winners and losers.
Many governments ... are using the fall in oil prices as an opportunity to reduce energy subsidies
The main upward revisions to our forecasts for growth are in the developed world. Wage growth remains disappointingly weak, even in the UK and the US where unemployment has fallen dramatically, but the sharp fall in headline inflation will provide some boost to real disposable income. Consumer confidence has improved most meaningfully in the US where we expect stronger consumer spending to account for the bulk of the 3 per cent GDP growth we expect for 2015.
The eurozone and UK forecasts for GDP growth in 2015 have been revised up to 1.2 per cent (from 0.9 per cent) and 2.6 per cent (from 2.4 per cent). And prospects for Japan, another key oil importer, are also slightly improved.
Our developed world aggregate GDP forecast is marginally higher as a result, rising to 2 per cent from 1.9 per cent in 2015 and 2.1 per cent from 1.9 per cent in 2016: Canada and Switzerland have suffered the biggest downward revisions, for energy and currency-related reasons.
Inflation meanwhile looks set to tumble across the developed world with other countries set to join the eurozone in recording negative inflation rates. Even if falling inflation were solely attributable to falling energy prices it is still likely to trouble central bankers. Underlying inflation, whether we focus on core inflation or wage growth, is uncomfortably low. Core CPI inflation was 0.6 per cent in the eurozone in January and core PCE inflation in the US was 1.3 per cent in December.
The largest net importers and therefore net beneficiaries of lower oil prices are in Asia. However, countries in the region are more likely to see higher government and business spending rather than improved consumption. This is because many governments, including those in China, India and Indonesia, are using the fall in oil prices as an opportunity to reduce energy subsidies. The fall in CPI inflation is, as a result, more muted, so the benefits are not being passed directly on to the consumer.
Lower oil prices will, however, help repair fiscal and current account positions that had become stretched immediately post crisis. Combined with the fact that longer-term global interest rates have hit a new low, some of the financing concerns that plagued emerging countries should ease. Many of these central banks have used, and are expected to continue using, the reprieve as an opportunity to reverse earlier rate hikes.
We have already seen interest rate cuts in China, India and Turkey and expect more to come. Inflation is deeply negative in much of CEE and while we believe this is largely ‘good deflation’, it is likely to linger for sufficiently long to nudge central banks into easing in most of that region. In other parts of the emerging world, such as South Africa and Colombia, we no longer expect rates to rise but instead remain on hold for an extended period.
The combination of a strong dollar and falling commodity prices has, however, created new financing concerns, which have intensified for the likes of Venezuela and Russia. We expect an even larger contraction in Russia of 3.5 per cent – previously down 3 per cent – coupled with double-digit inflation.
The Gulf region, with little debt and a large store of reserves, has no immediate financing issues but the lower oil price will certainly take its toll on the pace of activity. Considerably slower growth in government and investment spending in countries like Saudi Arabia will restrain overall GDP growth to rates that were half those seen in the heady days when oil was priced at over $100/barrel and China was firing on all cylinders.
We have also, once again, had to materially downgrade our forecast of activity in Brazil. However, this is largely attributable to the ongoing drought, which is rationing the country’s hydroelectric power and restricting drinking water in large cities such as Sao Paulo. We now forecast a contraction of 1.2 per cent in 2015 and a more muted rebound in 2016.
This takes our overall forecast for emerging world growth down slightly to 4 per cent in 2015 (from 4.1 per cent) and to 4.7 per cent in 2016 (from 4.8 per cent).
Stephen King is the chief global economist, HSBC Bank plc.