15 February 2015

Lower oil prices won’t boost global growth, says Moody’s Euro area weakness and Chinese slowdown to offset benefits of cheaper energy Featured

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Lower oil prices won’t boost global growth, says Moody’s.Euro area weakness and Chinese slowdown to offsetbenefits of cheaper energy.

 Lower oil prices will fail to give a significant boost to global growth in the next two years as headwinds from the

euro area, China, Japan and Russia hold back economic activity, said Moody’s Investors Service in its
quarterly Global Macro Outlook report published today.

Despite cheaper energy, Moody’s forecasts euro area gross domestic product (GDP) growth of just below 1%
in 2015, broadly unchanged from 2014, before rising to 1.3% in 2016. The ratings agency expects the benefits
of lower oil prices to be small in the euro area.

Moody’s has maintained its GDP growth forecast for the G20 countries at just under 3% in both 2015 and 2016,
broadly unchanged from 2014.

“Lower oil prices should, in principle, give a significant boost to global growth,” said Marie Diron, a Moody’s
Senior Vice President and author of the report. “However, a range of factors will offset the windfall income
gains from cheaper energy.

“In the euro area, the fall in oil prices takes place in an unfavourable economic climate, with high
unemployment, low or negative inflation and resurgent political uncertainty in some countries,” she added.

Weak demand in the euro area suggests that companies will have to pass on the lower energy costs, limiting
the potential for higher profit margins.

High unemployment and low or negative inflation in the euro area are likely to push wage growth lower,
dampening gains in real income. Worries about job security in certain countries could also encourage people
to save rather than spend.

Moody’s said the European Central Bank’s quantitative easing programme will have a positive but small impact
on the euro area economy, mainly through a further weakening of the euro.

Moody’s global growth outlook is based on the assumption that oil prices will average US$55 a barrel (Brent)
in 2015, rising to $65 on average in 2016. The report assumes that oil prices will stay near current levels in
2015 because demand and supply conditions are unlikely to change markedly in the near future.

Some G20 countries will benefit from lower oil prices, in particular the US and India. Lower oil prices will give
the US economy a boost over the next two years through higher consumer and corporate spending.

United States

Moody’s has raised its 2015 US GDP growth forecast to 3.2% from 3% in the last quarterly report and expects
growth to remain strong at 2.8% in 2016.

In China, cheaper oil will not stop the gradual and ongoing economic slowdown. Higher energy taxes and
government-controlled prices in some energy and transport sectors will dampen the impact of lower prices.

Moody’s forecasts that China’s GDP growth will fall to around 7% in 2015 from 7.4% in 2014. In 2016, GDP
growth is forecast to fall to 6.5%.

Lower oil prices will hit the G20’s major oil producing countries, including Russia and Saudi Arabia.

Moody’s forecasts a sharp recession in Russia that will last until 2017. In Saudi Arabia, higher fiscal spending
will maintain positive growth and offset the negative effects of lower oil prices.

The report highlighted multiple factors that could lead to lower growth in individual countries, but emphasised
that few of these risks would, on their own, have a large global impact. These risks included a disorderly
financial market response to US monetary policy tightening, a longer than forecast fall in China’s property
market and heightened political uncertainty and deflation or prolonged low inflation in the euro area.


Source: http://everyinvestor.co.uk

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