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IMF says drop in oil prices to persist, helping global growth to take off.

The Drop in oil prices to persist and IMF predicts global growth, according to Reuters; this would be between 0.3 and 0.7 percentage points above the Fund’s baseline world growth forecast of 3.8 per cent from October.

The recent drop in oil prices should persist, helping to boost global economic activity by up to 0.7 percentage points next year, two senior IMF economists wrote in a blog on Monday.

Brent prices have fallen more than 46 per cent since the year’s peak in June of above $115 per barrel, sped up by the November decision of the Organization of Petroleum Exporting Countries (OPEC) not to reduce production.

Saudi Arabia has also convinced its fellow OPEC members it is not in the group’s interest to cut oil output, however far prices may fall, the kingdom’s oil minister said.

“Overall, we see this as a shot in the arm for the global economy,” Olivier Blanchard, the IMF’s chief economist, and Rabah Arezki, head of the commodities research team, said in the blog.

The boost to the global economy would be between 0.3 and 0.7 percentage points above the Fund’s baseline world growth forecast of 3.8 per cent from October.

Lower oil prices should boost China’s gross domestic product growth by 0.4 to 0.7 percentage points above the Fund’s 7.1 per cent baseline estimate, assuming steady policies. In 2016, it could mean an extra 0.5 to 0.9 percentage points of growth.

For the United States, the GDP boost would be 0.2 to 0.5 percentage points above the Fund’s baseline estimate of 3.1 per cent for 2015. In 2016, it could add 0.3 to 0.6 percentage points to growth.

Oil futures are down over 20 per cent since the start of the month, a drop that, if sustained, would be the biggest monthly loss in four years, further evidence lower prices should persist.

The IMF economists said 65 to 80 per cent of the price decline owed to supply factors, including an unexpectedly quick return to Libya’s oil production and Iraq’s steady supply.

But they said both supply and demand remain uncertain as it is unclear what is motivating Saudi Arabia’s supply decisions and how lower oil prices could affect oil production investment.

Falling oil prices also have raised risks to financial stability, affecting banks with claims on the energy sector and the currencies of oil-exporting countries. The IMF warned volatility in prices and exchange rates could prompt global risk aversion.

“Currency pressures have so far been limited to a handful of oil exporting countries such as Russia, Nigeria, and Venezuela,” the economists wrote. “Given global financial linkages, these developments demand increased vigilance all around.”

Reuters 23 December 2014

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