Falling oil prices and the impact on global growth

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Falling oil prices and the impact on global growth

There has been significant media attention in recent weeks following a dramatic fall in oil prices. The impact of this fall depends primarily on whether the fall has been due to increasing supply or falling demand.

On this question our research partner, BCA, argues that increasing supply factors; technological advances in shale production and increased supply in some of the OPEC countries has been the primary factor.

Whilst increased supply can have both positive and negative impacts on global growth, the net impact is that it increases global spending. That is, oil consumers tend to react quickly to falling prices by spending more on non-energy goods and services.

The International Monetary Fund (IMF) estimates that the level of global real GDP would rise by 0.5% to 1.3% over a two-year period in response to a supply-induced 20% decline in oil prices, depending on the extent to which lower oil prices boost consumer and business confidence.

So on balance, as long as the lower prices can be sustained, there is likely to be a positive impact on global growth. However we stress that falling oil prices is only one influence on growth and other factors, including central bank action, also play a significant role.

As a result we have not altered our overall view of global growth at this time and thus our model portfolios have not been changed to reflect these developments.

The following chart and diagram illustrate the impact of the falling oil price on both regions and businesses.

Falling oil prices graph

* Information in this article has been drawn from The Bank Credit Analyst, December 2014

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