The precipitous decline in the dollar oil price to levels below $50/b is having a major impact on the global economic outlook. Leading forecasters (e.g. JP Morgan) suggests global growth can be boosted by 0.5% points over the year ahead. The US dollar rally has also been stronger than expected. Whereas the growth momentum in the global industrial sectors tended to moderate towards the end of 2014 (as if the global economy ran out of stimulus), the oil price injection is changing that, with retail sectors already responding to the increase in real household buying power. This, in turn, is positive for the global industrial sectors. The other key transmission channel of the oil stimulus is the added fuel to the global disinflationary trend, providing room to central banks where required to run easier monetary policies. Of course, oil exporters (and commodity exporters affected by lower commodity prices) will suffer, countering the global stimulus from the lower oil price. In all, real economy demand conditions should improve, which should also be more sustainable compared to the QE financial stimulus.
While the oil stimulus is potent, it is occurring in in a less than robust global growth environment, which is characterised by uneven growth. The US cyclical condition is looking much stronger than that in Europe and Japan, while China continues to drift to a lower growth trajectory and conditions in emerging economies remain mixed. From a flattish final quarter in 2014 (delivering similar growth compared to the third quarter), global growth is forecast to pick up in the first half of 2015 and more materially during the second half of the year as the stimulus from the lower oil price matures. This acceleration should continue during the first half of 2016. The forecast world real GDP growth rate in respect of 2015 is 3.6%, up a full percentage point from 2014 (at market exchange rates).
Regional context
The Euro area is a net oil importer and will benefit from the lower oil price, albeit that the latter is also strengthening deflation in the region. The ECB announced a bigger-than-expected QE programme over an 18-month period starting in March, which boosted share prices, but sunk the euro. Growth remains uneven, with Germany, Spain and Ireland exhibiting stronger growth, while France and Italy lag.
Growth is forecast to accelerate closer to 1.5% in 2015 from slightly below 1% in 2014. While the Syriza party won the Greece elections, we do not expect the country to exit the euro.
The USA unemployment rate has already declined to levels (5.6%) where the Fed typically start tightening policy; however, with inflation well within target and driven lower by the falling oil price, interest rate hike expectations are being shifted outwards to the second half of the year. Real GDP growth is expected to exceed 3% this year (from 2.5% last year).
The Japanese economy ended 2014 on a stronger note, with both consumption and investment expenditure picking up and the manufacturing sector looking strong early in 2015. There is some concern regarding sluggish employment growth. With the BoJ ready to step-up monetary stimulus (should the lower oil price drive renewed deflation), the forecast is for real GDP growth to accelerate to 1.5-2% in 2015 (from an estimated 0.2% in 2014).
In China, the authorities continue cleaning up the banking system and deflating the property bubble, which is putting a brake on economic growth. Monetary easing is anticipated in the face of a soft industrial sector and while growth is expected to come in at lower levels (closer to 7% or even lower in 2015), this is not expected to be a train smash.
Amongst emerging economies, India and East Asia are expected to benefit from the improved demand conditions in the USA and the lower oil price (Malaysia is an exception). A number of emerging economy central banks are also embarking on interest rate cuts in view of the benign inflation outlook (e.g. Hungary and Poland). The strong dollar is also beneficial to these countries’ export sectors. The outlook for the Brazilian economy remains for poor growth and Russia is expected to suffer a steep contraction; both these economies suffer an adverse impact from the lower oil price. Overall growth in emerging economies have been scaled down somewhat due to the differential impact of lower oil and commodity prices.
Pieter Laubscher
26 January 2015