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Moody’s sees little boost for global economy from lower oil

The investors service is not revising their global growth outlook, despite theories that the oil price will boost the economy

Today's lower oil prices are of course a pain in the derrick for oil-producing nations and oil companies alike, though they might’ve been expected to provide a much welcome boost for the world’s struggling economy. Not so, according to Moody’s Investors Service.

In its latest Global Macro Outlook 2015-16, entitled Lower oil price fails to spur global growth and published on 11 February, Moody’s said that while reduced oil prices – whose fall to around $50-60 a barrel from a peak of $115/b in June 2014 is expected to continue throughout 2015 – should in principle provide a significant boost to global growth, among some net oil importers several factors will offset any windfall income gains from cheaper oil.

“Such a large and sustained fall in oil prices would typically provide a sizeable boost to the global economy in general and in particular the G20 economies, most of which are net importers of oil. Yet, we are not revising up our global growth outlook,” says Marie Diron, senior vice president of credit policy at Moody’s.

For example, in China, a large oil importer, its higher energy taxes and state-controlled prices in some energy and transportation sectors will lessen any positive impact from lower oil prices. In any case, lower energy costs will not reverse China’s economic slowdown that’s been going on since 2009 – growth of 7.4% in 2014 was China’s weakest in 24 years. Moody’s estimates China’s growth will fall below 7% this year and to around 6.5% in 2016.

The fall in oil prices also comes amidst unfavourable economic environments in the euro area, Japan, Brazil, and other net oil importers in the G20. In particular, it cites high unemployment and resurgent political uncertainty in some euro countries and tighter monetary and fiscal policy in Brazil. 

“In this context, a large part of the income gains from lower oil prices is likely to be saved rather than spent,” it says, predicting that for both the euro area and Japan GDP growth will be below 1% this year, and then rising slightly above that mark in 2016, while in Brazil average GDP growth in 2014-16 will be around zero, at its lowest since the early 1990s.

Then, of course, the lower oil price will hit oil-producing economies among the G20, in particular Russia and Saudi Arabia. 

“In Russia, the slump in oil prices exacerbates the economic effects of a pre-existing downward trend in the economy’s potential and the geopolitical crisis. We forecast a sharp recession that will last until 2017,” Diron predicted.

While Moody’s notes that there will be some beneficiaries of lower oil prices – “among the G20, the US and India stand out” – it’s maintaining its previous economic growth forecast for the G20 economies. “We expect GDP growth of under 3% each year in 2015 and 2016, broadly unchanged from 2014 and from our November 2014 Global Macro Outlook,” says Diron. “Lower oil prices will weigh on net oil exporters' growth. Among some net oil importers, a number of factors will offset the windfall income gains from the lower oil price.”

In today’s uncertain environment, no report can omit the disclaimer than things could end up worse than predicted.

Among the potential risks is what Moody’s calls “a disorderly response by financial markets” to the expected tightening of monetary policy by the US Federal Reserve. This could lead to a sharp rise in the dollar and consequent lower capital flows to the more vulnerable emerging markets. 

There is also a range of possible adverse developments in China that would dampen global trade and growth, “including a sharper and longer fall in construction than we currently envisage, a large correction in elevated equity prices and protracted disinflation putting further pressure on profit margins,” it said.

The moribund euro area is also a potential lightning rod for risks, including political uncertainty that would jeopardise crucial fiscal and economic reforms and the increasing likelihood that Greece will have to leave the euro. 

“This exit from the monetary union could have negative credit implications for other members of the single currency, despite contagion risks being materially lower than at the peak of the crisis,” Diron said.

Although, on a more hopeful note, Diron added: “Taken in isolation, few of these sources of risks, if any, would have a significant impact globally.”

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