OPEC raises concerns of “contagious deflation” as oil prices fall

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A sharp decline in oil prices since mid-2014 is hurting the global economy more than previous falls that had supported global growth, the Organization of the Petroleum Exporting Countries (OPEC) said in its latest monthly report.

Oil prices have fallen to around $30/barrel from the highs of around $100, raising concerns about the global economy that were not seen during earlier declines.

OPEC said it was relatively easy to explain that oil price declines on previous occasions were supportive of the global economy.

On the positive side, consumers in advanced economies enjoyed greater spending ability and central banks were able to lower interest rates to stimulate their economies. On the negative side, the GDP shortfall in oil producing economies was usually only relative, given that the size of these economies was small. Thus, on a global level, their GDP shortfall was much less than the positive impact on the GDP of larger oil consuming nations, it said.

“This time, however, it seems that the overall negative effect from the sharp decline in oil prices since mid-2014 has outweighed benefits in the short-term and there seems to be a ‘contagious’ effect taking place across many aspects of the global economy,” OPEC said.

According to OPEC the after-effects from the ‘great recession’ has limited the potential rise in consumer spending. Additionally, the major central banks are not able to significantly lower interest rates further. “Investments in the oil sector have become a considerable factor for GDP growth in the past years and, consequently, recent shortfalls have caused an important negative impact – not only for emerging market producers but also for producer economies such as the US, Canada, the UK and others,” it said.

The considerable decline in oil prices is also affecting a wide range of important sectors, including manufacturing or agriculture, further accentuating the trend of low inflation in major economies. Most recently, additional contagious effects from low oil prices have become obvious. Already fragile economies have to now deal with severe financial strain, the report said.

“As long as uncertainty persists, investments will be held back, continuing to impact global GDP negatively. Moreover, tax regimes and currency developments in many advanced economies are offsetting the positive effects from lower oil prices,” the report said, adding that new oil-related taxes being discussed in the US and the European Union would further dilute the benefits of lower oil prices for consumers

“Contagious deflation, although probably temporary, is having a negative effect on income growth and consequently spending ability across all economies.

Several fargile economies are either in need of emergency funding, or have started to sell assets in order to meet their spending needs, a factor that is likely to have contributed to the most recent volatility in equity markets, OPEC said, adding that the consequences on their sovereign debt ratings and currency valuations are obvious and may include potential spill-over effects on the global economy.

In addition, the exposure of banks to the oil industry – in the form of loans granted to small- and medium-sized oil companies – and the relatively large share of junk bonds from shale producers has added to concerns in the financial industry, the report said.

 

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