The recent drop in oil prices should persist, helping to boost global economic activity by up to 0.7 percentage points next year, two senior IMF economists wrote in a blog on Monday.
Brent LCOc1 prices have fallen more than 46 percent since the year’s peak in June of above $115 per barrel, sped up by the November decision of the Organization of Petroleum Exporting Countries (OPEC) not to reduce production, Reuters reported.
Saudi Arabia has also convinced its fellow OPEC members it is not in the group’s interest to cut oil output, however far prices may fall, the country’s oil minister said.
“Overall, we see this as a shot in the arm for the global economy,” Olivier Blanchard, the IMF’s chief economist, and Rabah Arezki, head of the commodities research team, said in the blog.
The boost to the global economy would be between 0.3 and 0.7 percentage points above the Fund’s baseline world growth forecast of 3.8 percent from October.
Lower oil prices should boost China’s gross domestic product growth by 0.4 to 0.7 percentage points above the Fund’s 7.1 percent baseline estimate, assuming steady policies. In 2016, it could mean an extra 0.5 to 0.9 percentage points of growth.
For the United States, the GDP boost would be 0.2 to 0.5 percentage points above the Fund’s baseline estimate of 3.1 percent for 2015. In 2016, it could add 0.3 to 0.6 percentage points to growth.
Oil futures are down over 20 percent since the start of the month, a drop that, if sustained, would be the biggest monthly loss in four years, further evidence lower prices should persist.
The IMF economists said 65 to 80 percent of the price decline owed to supply factors, including an unexpectedly quick return to Libya’s oil production and Iraq’s steady supply.
Falling oil prices also have raised risks to financial stability, affecting banks with claims on the energy sector and the currencies of oil-exporting countries. The IMF warned volatility in prices and exchange rates could prompt global risk aversion.
Gold Under Pressure
Gold, the ultimate inflation hedge, isn’t much use to investors these days.
Oil is in a bear-market freefall that began in June, spearheading the longest commodity slump in at least a generation. The collapse means that instead of the surge in consumer prices that gold buyers have been expecting for much of the past decade, the US is “disinflating,” according to Bill Gross, who used to run the world’s biggest bond fund, Bloomberg reported.
A gauge of inflation expectations that closely tracks gold is headed for the biggest annual drop since the recession in 2008. While bullion rebounded from a four-year low last month, Goldman Sachs Group Inc. and Societe Generale SA reiterated their bearish outlooks for prices. The metal’s appeal as an alternative asset is fading as the dollar and US equities rally, and as the Federal Reserve moves closer to raising interest rates to keep the economy from overheating.
Gold climbed 70 percent from December 2008 to June 2011 as the US central bank bought debt and held borrowing costs at a record low. Prices slumped 28 percent last year, the most in three decades, after some investors lost faith in the metal as a store of value.
“Gold as an inflation hedge is unnecessary,” Atul Lele, who helps oversee $5.1 billion as the chief investment officer at Bahamas-based Deltec International Group, said Dec. 16. “ We think inflation in the US could rise, but nothing that should be a cause of worry.”
