Oil price: one's loss, another's gain

An analysis by Benoît Heitz, Co-Head of macroeconomic and country risk analysis
12 February 2015

The drop in oil prices, coupled with accommodative monetary policies, has recently supported activity in developed countries still struggling to pick themselves up, but is problematic for some producer countries.

After a disappointing first half of 2014, growth figures were not much better for developed countries in the third quarter: growth in the eurozone was still very sluggish and Japan fell back into a deep recession. In contrast, US growth was still robust and the UK appeared immune to sluggishness, albeit at the cost of growing imbalances.

The major emerging economies are currently experiencing a slowdown phase, but with variations, particularly in terms of whether it was unwanted (Brazil and Russia) or more or less intentional (China, for example).

In the wake of slow activity, Brent oil prices ultimately dropped sharply after remaining perched at $110 per barrel for three years. Now at less than $50, the price has fallen by more than half.

This decline is particularly welcomed by importing countries: for them it is a stimulus for activity and therefore does not increase deflationary risks—to the contrary, although it has edged inflation rates slightly downward (even below zero in some cases) in developed countries. In contrast, it may be a more or less significant problem for producer countries. The overall net impact on global growth is positive.

Against this backdrop of lower global economic activity and low inflation, the major central banks continue to support activity. In particular, a new quantitative easing measure was announced by the ECB, involving government bond purchases. As a result, nominal interest rates are expected to remain very low. Nonetheless, low inflation means real interest rates will not be that low...

Overall, the drop in oil prices and still generally extremely accommodative monetary policies, along with less adjustment of public finances in developed countries, will help global growth to recover. Nonetheless, this recovery will remain very gradual, so much so that it is still difficult to call it a true recovery.