World Economy
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As Oil Falls, Gap Widening in Multi-Speed World Economy

As Oil Falls, Gap Widening in  Multi-Speed World Economy As Oil Falls, Gap Widening in  Multi-Speed World Economy

Robust recovery in the United States, a moribund eurozone and slowing Chinese growth reflect global splits which plunging oil prices are likely to widen.

On the face of it, lower energy bills should give consumers and companies more money to spend and boost economic growth, at least for oil importers, CNBC reported.

But for those countries facing stagnation or even deflation, the prospect of downward pressure on prices is more worrying.

The likelihood is that a near 60 percent fall in the price of oil – from above $115 in mid-2014 to just $50 – will see those already growing strongly pick up further, leaving the laggards trailing in their wake.

Central bankers in the United States and Europe have clearly expressed the divide over an oil dividend in recent weeks.

“It is a huge plus for consumers, for businesses,” San Francisco Fed President John Williams said on Monday. A drag from weak economies elsewhere in the world would not counteract that, he calculated.

Minutes of the Fed’s December meeting said some of those present thought “the boost to domestic spending coming from lower energy prices could turn out to be quite large”.

Compare that with European Central Bank chief economist Peter Praet, speaking on the last day of 2014, days before eurozone inflation turned negative for the first time since 2009.

“With the recent oil prices, inflation would be even lower, even substantially lower than expected so far,” he said, noting that in the past the ECB would have looked past external shocks such as this but could no longer afford to.

Markets are certain the ECB will launch a Fed-style government bond-buying program with new money. Given that it may be curbed in some way to meet German concerns, there is much less certainty that it will deliver a jolt.

Most economists agree the US economy will benefit from low oil, which will harden expectations of an interest rate rise this year, but some see real stress elsewhere.

  Oil Producers Hit

For the major oil producers, the price plunge is a clear negative although the Persian Gulf oil nations have the reserves to ride through this unscathed.

Russia’s malaise is partly due to western sanctions over Ukraine but oil is probably a bigger factor in heralding a deep recession. The Kremlin needs something around $100 per barrel to make its budget work. A price of half that must mean steep tax rises and spending cuts or an alarming depletion of Moscow’s currency reserves.

Norway has been more prudent. Not a cent of oil revenue is used for budget spending, it merely spends the returns on the hundreds of billions of oil wealth saved in the past.

But lower returns means petroleum investments are likely to fall, cutting future state revenues.

For Japan, with a central bank pumping out money to get prices up, the story is a mixed one.

As a huge fuel importer, low oil will help the economy but it may not be enough to nudge Japanese households and companies, who hoarded cash during nearly two decades of deflation, to spend.

The oil rout complicates life for the Bank of Japan as it strives to get inflation from below 1 percent to a 2 percent target. But it sees more positives than negatives.

  BRICS Split

Russia’s travails have highlighted the divergent fortunes of the BRICS economies. Growth in China, the world’s second biggest economy, is slowing and the authorities have already cut interest rates for the first time in two years.

Data on Friday put Chinese inflation at a near five-year low of 1.5 percent, reflecting economic weakness which is likely to prompt more stimulus.

Brazil is battling high inflation with punitive interest rates while India is seeking to improve upon growth which is topping 5 percent annually.

With oil accounting for nearly a third of India’s imports, its current account should improve and inflation fall.

 

Financialtribune.com