Cheap Oil’s Global GDP Boost Offset by Europe, Brazil WoesAndrew Mayeda
Plunging oil prices are giving a bump to consumer and business spending around the world -- just not enough to increase global growth forecasts.
A darkening outlook in emerging markets including China, Russia and Brazil and geopolitical risks such as Greece’s possible exit from the euro are overshadowing the benefits from lower energy costs. The median estimate for 2015 world expansion from economists surveyed by Bloomberg News has been unchanged since October, when it fell to 3.5 percent from 3.6 percent.
“People are cautious in a world where they see other risks skewed to the downside,” said Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York. “There’s still a question mark out there.”
Economists’ reluctance to boost estimates underscores the fragility of global growth after four straight years of below-forecast expansion. JPMorgan is a case in point: It estimates that sustained $60-a-barrel crude oil prices will add 0.5 percent to global gross domestic product, yet its Jan. 2 world expansion forecast of 2.9 percent for 2015 is down from a 3.3 percent estimate in July.
The U.S., with a 3.2 percent expansion estimate, is the only one among the world’s 10 biggest economies that JPMorgan now sees growing more quickly than expected in July. The bank projects emerging markets will grow 3.9 percent this year, down from its July forecast of 4.9 percent, reflecting markdowns for nations including Russia, Brazil and India.
Oil’s 55 percent decline since June, the steepest rout since the global financial crisis, has benefited haven assets such as U.S. Treasuries while depressing the currencies of crude exporters such as Russia. The MSCI All-Country World Index of stocks has dropped about 3.6 percent in the same period.
Data released today highlighted the relative strength of the U.S. in the global economy. U.S. employment rose more than forecast in December and the jobless rate declined to 5.6 percent, capping the best year for the labor market since 1999.
Meanwhile, Germany’s industrial production unexpectedly fell in November from the previous month as energy output slumped, while China’s factory-gate prices in December extended a record stretch of year-over-year declines with the sharpest drop since 2012.
Lower oil prices may not be the “manna from heaven” some forecasters are expecting, HSBC Holdings Plc economists Stephen King and Karen Ward said in a report Thursday. High levels of debt in developed nations are likely to blunt the benefits of monetary easing, while declines in oil and other commodities are straining emerging countries, they said.
“The global economy was losing momentum and disinflation was building, meaning pricing power was being lost, before anything started to happen in the oil market,” Ward, who’s based in London, said in a phone interview.
Federal Reserve officials last month saw a mixed bag in oil prices and the state of the global economy, according to minutes of their December meeting, released this week in Washington.
While some policy makers said the drop in oil would have a positive impact on overseas employment and output, many officials “regarded the international situation as an important source of downside risks,” especially if oil’s decline and weak growth abroad affect financial markets, the minutes said.
The International Monetary Fund estimates that declining oil prices will increase global output by a range of 0.3 percent to 0.7 percent this year by boosting household incomes and lowering input costs for businesses, according to a blog post last month by chief economist Olivier Blanchard and Rabah Arezki, the head of the fund’s commodities research.
Yet Blanchard and Arezki gave a disclaimer in their blog, saying that the estimates of the impact from oil’s drop don’t “represent a forecast for the state of the world economy in 2015 and beyond.” The IMF will release an update to its World Economic Outlook later this month.
The fund’s last forecast in October was for global expansion of 3.8 percent this year, down from a 4 percent estimate given in July.
If low oil prices persist for years, that could herald a prolonged boom in the global economy, said Eric Green, head of U.S. economic research at TD Securities USA LLC in New York.
“Provided Europe doesn’t go back into recession or you don’t have some flareup of massive geopolitical risk or some financial issue, you are going to see global forecasts revised incrementally higher,” Green said in a phone interview.
Much will depend on whether the drop is driven by excess supply or softening global demand. The IMF estimates weak demand accounts for as little as 20 percent of oil’s decline. The more that’s a force, the less the world economy will benefit from lower crude prices, according to the Washington-based lender.
“If the drop in oil prices were only a supply shock, you’d most likely see a relatively strong boost to global growth,” said Gregory Daco, lead U.S. economist at Oxford Economics USA in New York. “Some of the weakness in oil prices is being driven by relatively modest global demand, which is why you’re not seeing in your surveys many outright increases in global growth.”