Falling crude oil prices are delivering an energy boost to the 2015 outlook. Driven primarily by oversupply, oil prices have dropped to the lowest level since 2009, according to BofA Merrill Lynch Global Research, report.
“Cheaper oil is likely to linger: our commodities team expect Brent oil price to average US$77/bbl next year, a 30% decline on 2014 levels providing a notable tailwind to the global economy. We have accordingly upgraded our growth forecasts, and we now expect 2015 GDP growth of 3.3% in the US (up by 0.2pp), 1.2% in the euro area (0.2pp) and 1.6% in Japan (0.2pp). Although positive on net, the oil price drop sharpens one of our key 2015 themes: divergence (GEMs Year Ahead: Parting waters),” the report titled “BofA Global Economic Weekly – “Filling up the tank,” added.
“Below we estimate the impact of oil price shocks across countries, contrasting the growth gains in Turkey, India and the largest DM economies with hits to Russia and Mexico. We also look at the impact on cross-country inflation rates. There may be more than a textbook supply shock at play, however. Declining oil prices seem to have weighed on medium term inflation expectations in impaired economies. This suggests that markets see more protracted demand weakness despite the stimulus from lower oil prices.
As ECB President Mario Draghi noted this week, the risk of second-round effects warrants caution. All told, cheaper oil may be a headache for central banks worried about “lowflation”, but it is likely to shore up growth in the largest economies.
“We showed recently that the decline in crude oil prices is good news for global growth (Oiling the machine). Our simulations suggest that a 30% drop in oil prices that reflects oversupply could add 0.4-0.5pp to global GDP growth over the following year. The negative oil shock could pull global inflation down by 0.2pp. Not surprisingly, the effect varies across economies. To illustrate this, we estimate a Bayesian vector auto regression linking GDP growth, headline inflation, oil prices, real effective exchange rates and the VIX volatility index. As Chart 2 shows, model simulations suggest that a supply-driven 30% drop in crude prices would favor Turkey, India and Japan. The world’s largest economies, the US, China and the euro area, would likewise benefit. On the inflation side, Chart 3 shows potentially large declines in Russia and Turkey. The impacts are closer to 0.2pp in the largest economies. While useful to rank the winners, these elasticities are first approximations. As our country experts note, the likely impact of the lower oil prices in EM depends on fiscal policy decisions (Oil matters). Moreover, the extent to which cheaper oil reflects weakening demand matters significantly for economies like Turkey and Korea. And the fall in the prices of iron ore, platinum and coal trims the oil bonanza for commodity exporters like Brazil, Indonesia and South Africa.”
Ethan Harris in US Overview noted that the healthier outlook for consumption growth outweighs diminished energy investment spending.
“We now expect stronger 2015 GDP growth (3.3%, up from 3.1%) and lower headline inflation (0.9%, down from 1.2%). Likewise in Europe, our euro area team sees modestly better growth (1.2%, up 0.2pp) and lower inflation (0.5%, down 0.2pp). EEMEA is the region most rattled by the oil plunge. While the outlook remains bleak for Russia, we have raised our 2015 GDP growth forecasts in CEE and Turkey (3.4%, up from 3.2%). Cheaper oil is also a mixed blessing in LatAm. We now expect slower GDP growth in Mexico (3.0%, down from 3.3%) and in Colombia (3.0%, down from 3.5%). As our LatAm team notes, Venezuela is being forced into further external adjustment while Brazil gains more wiggle room on both the external and fiscal fronts.”