Don’t Count on Oil Drop Greasing Global GrowthSimon Kennedy
The declining price of crude oil may no longer grease the wheels of the world economy as much as it once did -- and as much as International Monetary Fund Managing Director Christine Lagarde expects.
Recent history even may be on the side of contrarians like Fatih Yilmaz from London-based hedge fund SLJ Macro Partners LLP. On top of that, advances in energy efficiency and interest rates already at zero are likely to weaken the potential ripple effects of the 37 percent plunge in Brent crude this year.
“It is hard to make a strong statistical statement about the impact of declining oil prices on the global gross domestic product,” said Yilmaz in a Dec. 4 report.
Between 1970 and 2000, a 20 percent decline in oil typically added 0.25 point to worldwide GDP in the subsequent 20 months, his analysis showed. Since 2000, however, that relationship has broken down with the initial impact of an oil drop on GDP actually negative. It turns positive after a year and then fades.
That’s in contrast to Lagarde’s expectation that a 30 percent drop in the price of crude translates into a 0.8 percentage point boost for most advanced countries. Likewise, JPMorgan Chase & Co. estimates global growth is poised to enjoy a 0.7 point boost over two quarters, while Societe Generale SA estimates a 0.3 point lift after a year.
They may be overstating the effect of the oil decline because “some of the routes” that once linked lower oil with higher economic growth are blocked, according to Stephen King, chief economist at HSBC Holdings Plc.
For one thing, in the 1980s and 1990s, declining oil often led the U.S. Federal Reserve to lower interest rates. With U.S. rates already near zero, there’s no room for reductions, and it would take a lot of economic weakness to get it buying assets again, said King.
“In the absence of rate cuts, falling oil prices might unfortunately serve to increase already-widespread fears of deflation,” he said.
And now that the U.S. economy is a bigger producer thanks to the shale energy boom, lower oil may also no longer be as unambiguously good news as it once was for America.
“It is tempting to think that oil price declines always act to boost global economic activity,” said King. “In reality the story is rather more complicated.”
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