Standard Life|Frankfurt, 22.10.2014.
Helfen die niedrigen Energiepreise der Konjunktur in Europa oder verstetigen sie nur die disinflationären Tendenzen – dieser Frage geht James McCann, Volkswirt bei Standard Life Investments (SLI), in seinem Beitrag im aktuellen „Weekly Economic Briefing“ nach. Tatsächlich hätten externe Effekte wie Rohstoffpreise einen halben Prozentpunkt Inflation „gekostet“. Auch wenn zunächst die positiven Effekte überwiegen würden, sieht er die Gefahr, dass sich die Inflationserwartung dadurch dauerhaft nach unten bewegen würde. Dies hätte zur Folge, dass sie Eingang finde in die Preisgestaltung und eine Spiralbewegung auslöse; an den Marktpreisen für Derivate könne man bereits einen dramatischen Rückgang der Inflationserwartung erkennen.
Deshalb dürfe die EZB die Energiepreisentwicklung auch nicht als normalen Zyklus abtun, so McCann. Wenn, wie die Volkswirte von SLI erwarten, die bereits beschlossenen Maßnahmen keine Wirkung zeigten, sollte sie noch mehr Stimulus geben in Form eines größeren Anleihekaufprogramms. „Ein hartes Commitment der EZB zu ihren Inflationszielen würde die Inflationserwartungen der Märkte revidieren“, schreibt der für Europa zuständige Volkswirt von SLI.
Lesen Sie nun mehr dazu im unteren „Weekly Economic Briefing“ des großen britischen Investmenthauses, das die Auswirkungen des Ölpreisverfalls in den Regionen USA, UK, Europa, Japan und den Emerging Markets untersucht.
21 October 2014
Global Overview
The good oil…
Oil prices have plunged in recent months. Since peaking at around $115 per barrel (/b) in mid-June, the Brent spot price has fallen to $85/b, a decline of around 30%. Forward prices have come down as well. In June, the market was expecting the spot price to be around $100/b at the end of 2017; it is now just $92/b. At the same time, the spread between Brent and US-produced West Texas Intermediate (WTI) oil has come down from $9/b to $3/b. If sustained, this will boost overall global growth and redistribute income from net oil exporters to net oil importers. For example, recent analysis from the IMF suggests that in the average oil importing country, a 25% decline in oil prices raises GDP by around 0.3% over two years, although the beneficial impacts are much larger in countries like the Phillipines, Korea and India where oil import ratios are far higher. For oil exporters, the 25% decline in oil price has little negative effect on GDP over the first year, although it increases over time, subtracting -0.5% from GDP after three years. Within the developed world, the losers from lower oil prices are Norway and Canada, while in the emerging world, Venezuela, Nigeria, Brazil and much of the Middle East will be hit hard. Although oil futures were pointing downward back in June, the magnitude of the decline has caught markets off-guard. So, what happened? Supply dynamics have been important. US crude production has soared by 2 million barrels per day over the past two years, while Libyan production has also increased this year (see chart 1). Against this backdrop of strong supply growth, demand has also been weaker than expected, with global industrial production softening noticeably through the first half of the year. Some of the biggest declines have been in countries that use oil intensively, like China. Then there is the unexpected behaviour of Saudi Arabia, which is usually thought of as the world’s swing producer, acting to stabilise the price of oil in the face of shocks. They are not fulfilling that role at present, however. Although prices have come down significantly, the Saudis have not yet signalled that they will cut production. This seems to be a political rather than an economic decision; Saudi production costs are much lower than in Iran, Russia or the US so lower prices may be a way to bolster their own competive position, as well as settle old scores.
US
Oil be back…
Like other net oil importers, the US economy will benefit from the recent plunge in oil prices. Lower prices feed through to the real economy like a tax cut, increasing the disposable income of consumers and lowering input prices for non-oil producers. This should help cushion the negative impact of weaker external growth, the stronger dollar and the recent bout of financial volatility. That said, the positive effects of the most recent fall in oil prices will not be as large as in the past, owing to the transformation of America’s energy sector in recent years. Crude oil production increased to 265 million barrels per month in July, which was the largest amount since 1986. Oil production has been growing in excess of 10% per annum for three years now, the strongest sustained growth since the 1930s. Rapid growth in output has been fuelled primarily by technological breakthroughs that have made it more cost-effective to extract tight shale oil from fields like the Bakken shelf in North Dakota. Falling oil prices will weigh on income growth in the large producing states, most of which have been expanding at well above the national average in recent years. If sustained, lower prices will also act as a disincentive to further increase production, as many shale plays have breakeven prices close to the current spot price. In addition, capital spending on oil exploration, shafts and wells will probably slow as the return on investment fades. The other reason why lower oil prices will not be as stimulatory as in the past is that firms and consumers are using less oil per unit of GDP (see chart 2). Oil consumption dropped significantly during the global financial crisis and has grown more slowly than GDP since then. As a consequence, the domestic economy is currently using less oil than it was back in 2003. The major reason for the leap in energy efficiency is the price of oil itself; even taking into account the substantial fall in prices this year, the spot price of Brent is still $55 per barrel higher than it was a decade ago. This has incentivised more energy efficient production processes and consumer durables. For example, the average motor vehicle is able to travel an extra 17% per unit of gasoline than it did in 2003. The upshot of higher crude oil production and lower oil consumption is that the country’s petroleum trade deficit has been falling rapidly (see chart 3). Since the middle of 2011, the petroleum deficit has declined from 2.3% to just 1.1% of GDP as exports have risen and imports have dropped away. Indeed, the deficit is currently at its lowest level since 2003, despite oil prices having broadly trebled since then. The improvent in the petroleum balance is helping to mask the deterioration in the non-petroleum goods deficit, which at 3.3% of GDP, is as large as it was at the end of 2007. Looking ahead, these trends appear set to continue. The recent fall in oil prices will put further downward pressure on petroleum imports, as will additional shale production gains, although these gains are likely to slow somewhat over the next few years. Meanwhile, the non-petroleum trade deficit will probably widen over the next year as US domestic demand rises relative to demand in the rest of the world and the strong dollar undermines the competiveness of exporters, making imports relatively more attractive.
UK
A less beautiful sea…
Tracking the impact of changes in oil prices on the UK economy can be a tricky business. While UK North Sea oil production has fallen over recent years, it still represents around 2% of overall economic activity and some 12% of UK goods exports. More importantly, tax revenues from the oil sector account for around 5.5% of total receipts, according to a study by PwC. However, the impact of changing oil prices goes beyond direct taxation and extraction activities; lower oil prices weigh on inflation, boosting households’ real incomes and businesses’ margins. How do all these factors balance out in the UK? The impact on tax receipts may cause some consternation at the Treasury. The Office for Budget Responsibility (OBR) has estimated that a 20% decline in oil prices will reduce direct tax revenues from the sector by £2.4 billion. This comes at a time when the UK’s fiscal performance has been disappointing, despite an upturn in activity. We always need to take public finance data with a significant pinch of salt given that these are prone to major revisions. However, headline borrowing statistics over the current fiscal year have not declined compared to 2013/14. One caveat here is that direct tax revenues are not the only way that changes in oil prices affect public finances. The OBR estimates that other factors, including increased oil consumption, stronger economic activity and lower inflation-linked benefits/tax thresholds, make a temporary fall in oil prices positive for public finances over two years (see chart 4). This effect becomes even more pronounced if the fall in prices is permanent. How do lower oil prices affect activity rates? North Sea oil production is undergoing a structural decline as reserves are depleted, a process that permanently lower prices could accelerate as they discourage investment in harder to reach fields. However, the more powerful economic effects are likely to come through the impact of lower energy prices on inflation. The OBR estimate that if fully passed through, a 20% fall in oil prices should lower CPI inflation rates by 0.3%. This provides a boon for consumers by raising their purchasing power. This is significant given the unusually long and pronounced squeeze on UK real incomes since the crisis (see chart 5). The combination of weak inflationary pressures and improving wage growth should help ease the pressure on household budgets going forward. Finally, from an external trade perspective, the impact should be marginally positive; the UK has run a deficit in oil since the early 2000s, so lower oil prices will improve the UK’s terms of trade. We are already seeing the impact of lower energy prices on UK inflation, with headline CPI falling to a five-year low of 1.2% yearon- year in September, partly related to falling air fares. Core inflation has also slowed, with price growth in the services sector surprisingly weak given the strength of economic activity. The weakness in inflation reduces the pressure on the Bank of England to start tightening rates at a time when global economic indicators have wobbled. Indeed, the Bank of England’s Chief Economist Haldane warned about the impact of deteriorating Eurozone growth on the UK recovery. On balance, we continue to expect the Bank to first start tightening in early 2015, although recent events have raised the risk that it looks to delay until the summer.
EUROPE
Another disinflationary force…
Most people are in agreement that the Eurozone needs more inflation. Price growth across the currency union slowed again in September to just 0.3% year-on-year, with price declines recorded in five member states. How should we interpret the further decline in international commodity prices, which will prove to be another disinflationary force? In many ways, this should be seen as a positive development given the support it provides for beleaguered households. However, there is cause for concern that the continued weakness in inflation could shift from a temporary to more permanent phenomenon if it affects expectations. Lower international commodity prices have been a key component of the fall in Eurozone inflation seen over recent years (see chart 6). Indeed, ‘external forces’ driving Eurozone inflation, such as energy and food prices, have subtracted 0.5 percentage points from the headline reading. Adding to this is the lagged effect of earlier appreciation in the euro exchange rate. The expectation had been that these external drivers would soften as previous falls in energy prices fell out of the annual calculation and the recent depreciation in the euro supported imported inflation. It now looks likely that the energy price channel will continue to prove a disinflationary force in the Eurozone. Nevertheless, the reduction in energy prices should support real incomes at a time when domestic demand has been weak. Ideally, this increase in income would be used for consumption, which would provide some much needed stimulus across the continent. Even if households opt to save this windfall, the improvement in personal finances will at least contribute to an easing in debt burdens that have built up on household balance sheets in parts of the Eurozone. There are, however, risks that low, externally-driven inflation that is perceived to be temporary becomes more permanent. Inflation expectations, particularly on shorter time horizons, are sensitive to developments in current inflation. If these fall permanently, low inflation may become entrenched in domestic price setting behaviour. There has been some evidence that this might already be taking place in the Eurozone. According to market pricing, inflation expectations have fallen over recent months, sparking alarm within the European Central Bank (ECB) (see chart 7). How should the ECB conduct policy in this environment? If it were confident over the medium term about inflation and inflation expectations, it should look through swings in energy prices. However, given concern over the weakening trend in domesticallygenerated inflation the central bank should be vigilant. Over the coming months, the ECB should monitor the efficacy of its ABS purchases and targeted liquidity operations. If, as we believe, these measures do not prove sufficient to prevent further disappointments in the ECB’s growth and inflation forecasts, then the central bank should offer more stimulus in the form of a larger sovereign bond base purchase programme. This would support domestically-generated inflation in the currency union and boost inflation expectations as the ECB shows a strong commitment to meeting its inflation target.
JAPAN
Fuel to the fire…
Since posting a trade surplus of ¥6.6 trillion (tn) in 2010, Japan’s external balance has plummeted, resulting in significant income outflows (see chart 8). The fact that the shift in the balance coincided with the shutdown of the nation’s nuclear power industry, in the aftermath of the 2011 Tohoku earthquake and tsunami, suggests that resource-producing nations have been the key beneficiaries of this trend. Indeed, the oil-related deficit widened to ¥25.9tn in 2013, compared to ¥16.3tn in 2010, accounting for nearly half of the total deterioration in the deficit during this period. However, will the loss to major energy exporters from lower oil prices really be Japan’s gain? Attempts to model the implications of falling oil prices on the underlying economy are complicated by divergences in the underlying drivers during periods of weak oil prices. However, over the longer-term Japanese growth has consistently been negatively correlated with oil price movements. Efforts to isolate the impact of a 10% decline in oil prices on the Japanese economy suggest that real GDP growth will be boosted by 0.1% in the first year, with a similar effect the following year. However, are there reasons to be more cautious about the oil impact in Japan? If weaker oil price dynamics are part of the end to a supply cartel or the emergence of alternative sources of energy, the repercussions are likely to be nearly universally positive for a country where mineral fuels account for 30% of overall import value. If, on the other hand, the recent oil price weakness is a direct result of softer aggregate global demand, then the longer-term negatives associated with a weakening global economy may offset any short-term price benefits. Of course, the composition of any slowdown in aggregate demand can be just as important as the absolute levels. Recent data have pointed to flagging activity in Europe, as well as energyexporting nations (particularly in EM), while growth has appeared more solid in the US economy and to a lesser extent Asia. Given the geographic composition of Japan’s exports (see chart 9), Japan appears relatively well-positioned to benefit from lower oil prices, even if the decline has a demand component. Add to this the significant contribution of transportation equipment, mainly autos, to the value of Japanese export values and the price dynamics appear even more favourable. Of course, it is understandable that markets may be concerned about the possibility that US growth will be held back by weakness elsewhere, hence the recent bloodletting, but we may need to see further evidence of contagion before the current dual-speed global economy can be declared dead. A more certain consequence of the oil price moves is a further reduction in Japan’s deficit. The trade deficit in the first 20 days of September stood at ¥768.2 billion (bn), compared to a ¥1,002.1bn in the first 20 days of September 2013. Further weakness in energy import costs is likely to increase the pace of the contraction in the trade deficit in October. Of course, this improvement is far less sustainable than the export-led recovery in Japan’s trade account envisioned by many in the aftermath of 2013’s yen weakness. However, for now, worries about the impact of Japan’s trade balance on its current account are likely to subside.
EMERGING MARKETS
PetroState of Affairs…
For emerging markets, the impact of lower oil prices will be mixed; lower energy costs will undoubtedly benefit net importers, while oil producing countries will suffer varying degrees of impact. Some of the biggest beneficiaries are oil intensive economies such as Korea, Taiwan, and Thailand, while the most adversely affected are Venezuela, Russia and the Gulf states. Governments that rely on high prices to balance their budgets will suffer the most, both in lower government revenues but also slowing growth in oil servicing industries. If oil prices continue to stay in their current range, many producing countries will have to cut back on government spending or go into deficit (see chart 10). Not all countries will be affected equally. Saudi Arabia, the world’s largest exporter and OPEC’s most influential member, might not rush to cut production even though it would start running a budget deficit with oil at $90 per barrell. Saudi Arabia’s large sovereign wealth fund would help buttress the impact of lower prices, additionally Saudi Arabia may be interested in using lower prices to force Western oil companies to cut back on some less profitable production in an effort to secure market share. However, the IMF recently warned that Saudi Arabia could slip into deficit much sooner than expected. Saudi Arabia and other Gulf states have dramatically increased domestic spending since the start of the Arab Spring. To highlight this fact, in 2009 Gulf states relied on oil priced at $62 a barrel to balance their budget, last year that baseline rose to $82 and is climbing. To determine which countries will struggle the most with falling oil prices, it can be helpful to look at the size of the oil & gas industry relative to the overall economy (see chart 11). Countries where oil revenues make up a smaller share of the economy can potentially weather the drop in prices but will have to make efforts to broaden their tax base. However, nations with oil revenues comprising a large share of GDP and tax revenues face a tough choice between cutting government spending or going into deficit. Among the least diversified countries at the moment, with oil and gas making up at least 40% of GDP, are Kuwait, Libya, Iraq, and the Republic of Congo. While not as economically dependent as Gulf countries, Venezuela might be the hardest hit; it is currently facing $35.4 billion in external public debt and experiencing inflation close to 60%. The government has very few options to deal with falling oil revenues and runaway inflation. Russia is in a similar situation – in addition to damaging sanctions, lower oil prices have caused its budget to lose about $2 billion for every $1 drop in the price of a barrel of oil. Moscow’s budget is predicated on Brent crude prices above $100 a barrel, anything below $104 a barrel will push the Russian budget into deficit. On the upside, net importers, which comprise the majority of EM countries, stand to gain from lower oil prices. Inflationary countries such as Turkey, India, and Chile will benefit from the deflationary impact of lower energy costs. In addition, for countries subsidising energy prices, such as Indonesia and India, the decline in oil prices represents a better fiscal balance.
