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- Global growth will receive a boost from lower oil prices, which
reflect to an important extent higher supply. But this boost is
projected to be more than offset by negative factors, including
investment weakness as adjustment to diminished expectations about
medium-term growth continues in many advanced and emerging market
economies.
- Global growth in 2015–16 is projected at 3.5 and 3.7 percent,
downward revisions of 0.3 percent relative to the October 2014
World Economic Outlook (WEO). The revisions reflect a reassessment
of prospects in China, Russia, the euro area, and Japan as well as
weaker activity in some major oil exporters because of the sharp drop in
oil prices. The United States is the only major economy for which growth
projections have been raised.
- The distribution of risks to global growth is more balanced than
in October. The main upside risk is a greater boost from lower oil
prices, although there is uncertainty about the persistence of the oil
supply shock. Downside risks relate to shifts in sentiment and
volatility in global financial markets, especially in emerging market
economies, where lower oil prices have introduced external and balance
sheet vulnerabilities in oil exporters. Stagnation and low inflation are
still concerns in the euro area and in Japan.
Four key developments have shaped the global outlook since the release
of the October 2014 WEO.
First, oil prices in U.S. dollars have declined by about 55 percent since
September. The decline is partly due to unexpected demand weakness in some
major economies, in particular, emerging market economies—also reflected in
declines in industrial metal prices. But the much larger decline in oil
prices suggests an important contribution of oil supply factors, including
the decision of the Organization of the Petroleum Exporting Countries (OPEC)
to maintain current production levels despite the steady rise in production
from non-OPEC producers, especially the United States. Oil futures prices
point to a partial recovery in oil prices in coming years, consistent with
the expected negative impact of lower oil prices on investment and future
capacity growth in the oil sector.
Second, while global growth increased broadly as expected to 3¾ percent
in the third quarter of 2014, up from 3¼ percent in the second quarter, this
masked marked growth divergences among major economies. Specifically, the
recovery in the United States was stronger than expected, while economic
performance in all other major economies—most notably Japan—fell short of
expectations. The weaker-than-expected growth in these economies is largely
seen as reflecting ongoing, protracted adjustment to diminished expectations
regarding medium-term growth prospects, as noted in recent issues of the
WEO.
Third, with more marked growth divergence across major economies, the
U.S. dollar has appreciated some 6 percent in real effective terms relative
to the values used in the October 2014 WEO. In contrast, the euro and the
yen have depreciated by about 2 percent and 8 percent, respectively, and
many emerging market currencies have weakened, particularly those of
commodity exporters.
Fourth, interest rates and risk spreads have risen in many emerging
market economies, notably commodity exporters, and risk spreads on
high-yield bonds and other products exposed to energy prices have also
widened. Long-term government bond yields have declined further in major
advanced economies, reflecting safe haven effects and weaker activity in
some, while global equity indices in national currency have remained broadly
unchanged since October.
Developments since the release of the October WEO have conflicting
implications for the growth forecasts. On the upside, the decline in oil
prices driven by supply factors—which, as noted, are expected to reverse
only gradually and partially—will boost global growth over the next two
years or so by lifting purchasing power and private demand in oil importers
(see box). The impact is forecast to be stronger in advanced economy oil
importers, where the pass-through to end-user prices is expected to be
higher than in emerging market and developing oil importers. In the latter,
more of the windfall gains from lower prices are assumed to accrue to
governments (for example, in the form of lower energy subsidies), where they
may be used to shore up public finances. However, the boost from lower oil
prices is expected to be more than offset by an adjustment to lower
medium-term growth in most major economies other than the United States. At
3.5 and 3.7 percent, respectively, global growth projections for 2015–16
have been marked down by 0.3 percent relative to the October 2014 WEO
(Table 1).
Among major advanced economies, growth in the United States
rebounded ahead of expectations after the contraction in the first quarter
of 2014, and unemployment declined further, while inflation pressure stayed
more muted, also reflecting the dollar appreciation and the decline in oil
prices. Growth is projected to exceed 3 percent in 2015–16, with domestic
demand supported by lower oil prices, more moderate fiscal adjustment, and
continued support from an accommodative monetary policy stance, despite the
projected gradual rise in interest rates. But the recent dollar appreciation
is projected to reduce net exports.
In the euro area, growth in the third quarter of 2014 was
modestly weaker than expected, largely on account of weak investment, and
inflation and inflation expectations continued to decline. Activity is
projected to be supported by lower oil prices, further monetary policy
easing (already broadly anticipated in financial markets and reflected in
interest rates), a more neutral fiscal policy stance, and the recent euro
depreciation. But these factors will be offset by weaker investment
prospects, partly reflecting the impact of weaker growth in emerging market
economies on the export sector, and the recovery is projected to be somewhat
slower than forecast in October, with annual growth projected at 1.2 percent
in 2015 and 1.4 percent in 2016.
In Japan, the economy fell into technical recession in the third
quarter of 2014. Private domestic demand did not accelerate as expected
after the increase in the consumption tax rate in the previous quarter,
despite a cushion from increased infrastructure spending. Policy
responses—additional quantitative and qualitative monetary easing and the
delay in the second consumption tax rate increase—are assumed to support a
gradual rebound in activity and, together with the oil price boost and yen
depreciation, are expected to strengthen growth to above trend in 2015–16.
In emerging market and developing economies, growth is projected
to remain broadly stable at 4.3 percent in 2015 and to increase to 4.7
percent in 2016—a weaker pace than forecast in the October 2014 WEO. Three
main factors explain the downshift:
• Lower growth in China and its implications for emerging Asia:
Investment growth in China declined in the third quarter of 2014, and
leading indicators point to a further slowdown. The authorities are now
expected to put greater weight on reducing vulnerabilities from recent rapid
credit and investment growth and hence the forecast assumes less of a policy
response to the underlying moderation. Slower growth in China will also have
important regional effects, which partly explains the downward revisions to
growth in much of emerging Asia. In India, the growth forecast is
broadly unchanged, however, as weaker external demand is offset by the boost
to the terms of trade from lower oil prices and a pickup in industrial and
investment activity after policy reforms.
• A much weaker outlook in Russia: The projection reflects the
economic impact of sharply lower oil prices and increased geopolitical
tensions, both through direct and confidence effects. Russia’s sharp
slowdown and ruble depreciation have also severely weakened the outlook for
other economies in the Commonwealth of Independent States (CIS) group.
• Downward revisions to potential growth in commodity exporters:
In many emerging and developing commodity exporters, the projected rebound
in growth is weaker or delayed compared with the October 2014 projections,
as the impact of lower oil and other commodity prices on the terms of trade
and real incomes is now projected to take a heavier toll on medium-term
growth. For instance, the growth forecast for Latin America and the
Caribbean has been reduced to 1.3 percent in 2015 and 2.3 percent in 2016.
Although some oil exporters, notably members of the Cooperation Council for
the Arab States of the Gulf, are expected to use fiscal buffers to avoid
steep government spending cuts in 2015, the room for monetary or fiscal
policy responses to shore up activity in many other exporters is limited.
Lower oil and commodity prices also explain the weaker growth forecast for
sub-Saharan Africa, including a more subdued outlook for Nigeria
and South Africa.
|
|
Table 1. Overview of the World Economic Outlook
Projections
(Percent change unless noted otherwise) |
|
|
Year over Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Difference
from October 2014 WEO Projections |
|
Q4 over Q4 |
|
|
|
Projections |
|
|
Estimates |
Projections |
|
2013 |
2014 |
2015 |
2016 |
|
2015 |
2016 |
|
2014 |
2015 |
2016 |
World Output
1/ |
3.3 |
3.3 |
3.5 |
3.7 |
|
-0.3 |
-0.3 |
|
3.1 |
3.4 |
3.9 |
Advanced Economies |
1.3 |
1.8 |
2.4 |
2.4 |
|
0.1 |
0.0 |
|
1.7 |
2.7 |
2.3 |
United States |
2.2 |
2.4 |
3.6 |
3.3 |
|
0.5 |
0.3 |
|
2.6 |
3.4 |
3.2 |
Euro Area |
-0.5 |
0.8 |
1.2 |
1.4 |
|
-0.2 |
-0.3 |
|
0.7 |
1.4 |
1.4 |
Germany |
0.2 |
1.5 |
1.3 |
1.5 |
|
-0.2 |
-0.3 |
|
1.0 |
1.7 |
1.3 |
France |
0.3 |
0.4 |
0.9 |
1.3 |
|
-0.1 |
-0.2 |
|
0.3 |
1.2 |
1.3 |
Italy |
-1.9 |
-0.4 |
0.4 |
0.8 |
|
-0.5 |
-0.5 |
|
-0.5 |
0.9 |
0.8 |
Spain |
-1.2 |
1.4 |
2.0 |
1.8 |
|
0.3 |
0.0 |
|
1.9 |
1.8 |
1.7 |
Japan |
1.6 |
0.1 |
0.6 |
0.8 |
|
-0.2 |
-0.1 |
|
-0.3 |
1.6 |
0.2 |
United Kingdom |
1.7 |
2.6 |
2.7 |
2.4 |
|
0.0 |
-0.1 |
|
2.7 |
2.7 |
2.2 |
Canada |
2.0 |
2.4 |
2.3 |
2.1 |
|
-0.1 |
-0.3 |
|
2.4 |
2.1 |
2.1 |
Other Advanced Economies
2/ |
2.2 |
2.8 |
3.0 |
3.2 |
|
-0.2 |
-0.1 |
|
2.3 |
. . . |
. . . |
Emerging Market and Developing Economies
3/ |
4.7 |
4.4 |
4.3 |
4.7 |
|
-0.6 |
-0.5 |
|
4.5 |
4.1 |
5.4 |
Commonwealth of Independent States |
2.2 |
0.9 |
-1.4 |
0.8 |
|
-2.9 |
-1.7 |
|
-1.5 |
-3.5 |
1.8 |
Russia |
1.3 |
0.6 |
-3.0 |
-1.0 |
|
-3.5 |
-2.5 |
|
0.0 |
-5.4 |
1.9 |
Excluding Russia |
4.3 |
1.5 |
2.4 |
4.4 |
|
-1.6 |
-0.2 |
|
. . . |
. . . |
. . . |
Emerging and Developing Asia |
6.6 |
6.5 |
6.4 |
6.2 |
|
-0.2 |
-0.3 |
|
6.4 |
6.3 |
6.2 |
China |
7.8 |
7.4 |
6.8 |
6.3 |
|
-0.3 |
-0.5 |
|
7.4 |
6.7 |
6.3 |
India
4/ |
5.0 |
5.8 |
6.3 |
6.5 |
|
-0.1 |
0.0 |
|
5.6 |
6.5 |
6.6 |
ASEAN-5
5/ |
5.2 |
4.5 |
5.2 |
5.3 |
|
-0.2 |
-0.1 |
|
4.6 |
5.1 |
5.5 |
Emerging and Developing Europe |
2.8 |
2.7 |
2.9 |
3.1 |
|
0.1 |
-0.2 |
|
2.9 |
. . . |
. . . |
Latin America and the Caribbean |
2.8 |
1.2 |
1.3 |
2.3 |
|
-0.9 |
-0.5 |
|
1.1 |
. . . |
. . . |
Brazil |
2.5 |
0.1 |
0.3 |
1.5 |
|
-1.1 |
-0.7 |
|
-0.3 |
0.1 |
2.2 |
Mexico |
1.4 |
2.1 |
3.2 |
3.5 |
|
-0.3 |
-0.3 |
|
2.6 |
3.4 |
3.5 |
Middle East, North Africa, Afghanistan, and
Pakistan |
2.2 |
2.8 |
3.3 |
3.9 |
|
-0.6 |
-0.5 |
|
. . . |
. . . |
. . . |
Saudi Arabia
6/ |
2.7 |
3.6 |
2.8 |
2.7 |
|
-1.6 |
-1.7 |
|
. . . |
. . . |
. . . |
Sub-Saharan Africa |
5.2 |
4.8 |
4.9 |
5.2 |
|
-0.9 |
-0.8 |
|
. . . |
. . . |
. . . |
Nigeria |
5.4 |
6.1 |
4.8 |
5.2 |
|
-2.5 |
-2.0 |
|
. . . |
. . . |
. . . |
South Africa |
2.2 |
1.4 |
2.1 |
2.5 |
|
-0.2 |
-0.3 |
|
1.0 |
1.9 |
2.8 |
Memorandum |
|
|
|
|
|
|
|
|
|
|
|
Low-Income Developing Countries |
6.1 |
5.9 |
5.9 |
6.1 |
|
-0.6 |
-0.5 |
|
. . . |
. . . |
. . . |
World Growth Based on Market Exchange Rates |
2.5 |
2.6 |
3.0 |
3.2 |
|
-0.2 |
-0.2 |
|
2.4 |
2.9 |
3.2 |
World Trade Volume (goods and services) |
3.4 |
3.1 |
3.8 |
5.3 |
|
-1.1 |
-0.2 |
|
. . . |
. . . |
. . . |
Imports |
|
|
|
|
|
|
|
|
|
|
|
Advanced Economies |
2.0 |
3.0 |
3.7 |
4.8 |
|
-0.6 |
-0.2 |
|
. . . |
. . . |
. . . |
Emerging Market and
Developing Economies |
5.5 |
3.6 |
3.2 |
6.1 |
|
-2.9 |
-0.2 |
|
. . . |
. . . |
. . . |
Commodity Prices (U.S. dollars) |
|
|
|
|
|
|
|
|
|
|
|
Oil
7/ |
-0.9 |
-7.5 |
-41.1 |
12.6 |
|
-37.8 |
14.6 |
|
-28.6 |
-19.5 |
9.6 |
Nonfuel (average based on world commodity export
weights) |
-1.2 |
-4.0 |
-9.3 |
-0.7 |
|
-5.2 |
0.1 |
|
-7.4 |
-4.5 |
-0.4 |
Consumer Prices |
|
|
|
|
|
|
|
|
|
|
|
Advanced Economies |
1.4 |
1.4 |
1.0 |
1.5 |
|
-0.8 |
-0.4 |
|
1.4 |
1.0 |
1.8 |
Emerging Market and Developing Economies
3/ |
5.9 |
5.4 |
5.7 |
5.4 |
|
0.1 |
0.2 |
|
5.8 |
6.3 |
5.6 |
London Interbank Offered Rate (percent) |
|
|
|
|
|
|
|
|
|
|
|
On U.S. Dollar Deposits (six month) |
0.4 |
0.3 |
0.7 |
1.9 |
|
0.0 |
0.3 |
|
0.3 |
1.1 |
2.6 |
On Euro Deposits (three month) |
0.2 |
0.2 |
0.0 |
0.1 |
|
-0.1 |
-0.1 |
|
0.1 |
0.0 |
0.1 |
On Japanese Yen Deposits (six month) |
0.2 |
0.2 |
0.1 |
0.1 |
|
0.0 |
0.0 |
|
0.2 |
0.1 |
0.1 |
|
Note: Real effective exchange rates
are assumed to remain constant at the levels prevailing during
December 8, 2014–January 5, 2015. When economies are not listed
alphabetically, they are ordered on the basis of economic size. The
aggregated quarterly data are seasonally adjusted.
1/ The quarterly estimates and projections account for 90 percent of
the world purchasing-power-parity weights.
2/ Excludes the G7 (Canada, France, Germany, Italy, Japan, United
Kingdom, United States) and euro area countries.
3/ The quarterly estimates and projections account for approximately
80 percent of the emerging market and developing economies.
4/ For India, data and forecasts are presented on a fiscal year
basis and output growth is based on GDP at market prices.
Corresponding growth rates for GDP at factor cost are 4.7, 5.6, 6.3,
and 6.5 percent for 2013/14, 2014/15, 2015/16, and 2016/17,
respectively.
5/ Indonesia, Malaysia, Philippines, Thailand, Vietnam.
6/ For Saudi Arabia, the revisions to the growth forecasts for
2015-16 partly reflect a rebasing of the national accounts to 2010,
which resulted in a higher share of the oil sector in the economy
and a downward revision of estimated actual growth in 2013 and 2014.
7/ Simple average of prices of U.K. Brent, Dubai Fateh, and West
Texas Intermediate crude oil. The average price of oil in U.S.
dollars a barrel was $96.26 in 2014; the assumed price based on
futures markets is $56.73 in 2015 and $63.88 in 2016. |
Risks to the Outlook, Old and New
Sizable uncertainty about the oil price path in the future and the
underlying drivers of the price decline has added a new risk dimension to
the global growth outlook. On the upside, the boost to global demand from
lower oil prices could be greater than is currently factored into the
projections, especially in advanced economies. But oil prices could also
have overshot on the downside and could rebound earlier or more than
expected if the supply response to lower prices is stronger than forecast.
Important other downside risks remain. In global financial markets,
risks related to shifts in markets and bouts of volatility are still
elevated. Potential triggers could be surprises in activity in major
economies or surprises in the path of monetary policy normalization in the
United States in the context of a continued uneven global expansion.
Emerging market economies are particularly exposed, as they could face a
reversal in capital flows. With the sharp fall in oil prices, these risks
have risen in oil exporters, where external and balance sheet
vulnerabilities have increased, while oil importers have gained buffers. In
the euro area, inflation has declined further, and adverse
shocks—domestic or external—could lead to persistently lower inflation or
price declines, as monetary policy remains slow to respond. In many major
economies, there are still some downside risks to prospective potential
output, which would feed into near-term demand. Geopolitical risks
are expected to remain high, although related risks of global oil market
disruptions have been downgraded in view of ample net flow supply.
Policies
Weaker projected global growth for 2015–16 further underscores that
raising actual and potential output is a policy priority in most economies,
as discussed in previous issues of the WEO. There is an urgent need for
structural reforms in many economies, advanced and emerging market alike,
while macroeconomic policy priorities differ. In most advanced economies,
output gaps are still substantial, inflation is below target, and monetary
policy remains constrained by the zero lower bound. The boost to demand from
lower oil prices is thus welcome, but additional policy measures are needed
in some economies. In particular, if the further declines in inflation, even
if temporary, lead to additional downdraft in inflation expectations in
major economies, monetary policy must stay accommodative through other means
to prevent real interest rates from rising. Fiscal adjustment must be
attuned in pace and composition to supporting both the recovery and
long-term growth. In this respect, there is a strong case for increasing
infrastructure investment in some economies. In many emerging market
economies, macroeconomic policy space to support growth remains limited. But
in some, lower oil prices will alleviate inflation pressure and external
vulnerabilities, thereby allowing central banks not to raise policy interest
rates or to raise them more gradually.
Oil exporters, for which oil receipts typically contribute to a sizable
share of fiscal revenues, are experiencing larger shocks in proportion to
their economies. Those that have accumulated substantial funds from past
higher prices and have fiscal space can let fiscal deficits increase and
draw on these funds to allow for a more gradual adjustment of public
spending to the lower prices. Allowing substantial exchange rate
depreciation will be the main means available to others to cushion the
impact of the shock on their economies. Some will have to strengthen their
monetary frameworks to avert the possibility that depreciation will lead to
persistently higher inflation and further depreciation.
Lower oil prices also offer an opportunity to reform energy subsidies and
taxes in both oil exporters and importers. In oil importers, the saving from
the removal of general energy subsidies should be used toward more targeted
transfers, to lower budget deficits where relevant, and to increase public
infrastructure if conditions are right.
The Effects of Lower Oil Prices on the Global Economy1 |
Lower oil prices due to supply shifts
boost global growth, although with important differences between oil
importers and exporters. The global economic impact depends
crucially on how large and persistent the oil supply shifts are
expected to be. The more persistent they are, the more consumers and
firms will adjust consumption and production. Given the
considerable uncertainty about the impact of lower prices on future
oil supply, Arezki and Blanchard (2014) consider two scenarios with
different assumptions concerning the supply-related change in
the oil price going forward. In the first scenario, 60 percent
of the decline in the WEO oil price path through 2019 relative to
the one used in the October 2014 WEO is attributed to supply shifts
(in other words, the scenario assumes an oil price decline of
22 percent in 2015 and 13 percent in 2019). In the second, the
supply shift accounts for 60 percent of the price decline initially,
but its contribution will gradually decline to zero by 2019 because
of the supply response to lower prices. Under the first scenario,
the supply shift lifts global GDP by 0.7 and 0.8 percent,
respectively, in 2015–16. In the second scenario, the same initial
supply shift implies an increase in global GDP of 0.3 percent
in 2015 and 0.4 percent in 2016 relative to what was expected with
the oil price path used in the October WEO.
These global effects of lower oil prices mask asymmetric effects
across countries. Oil importers will benefit from higher real
incomes of consumers and lower costs in the production of final
goods. Among importers, the oil intensity in consumption and
production varies, but the simulations used in the scenario analysis
suggest GDP increases between 0.4 and 0.7 percent in 2015 in the
case of China and between 0.2 and 0.5 percent in the United States.
For many importers, the boost from lower oil prices—while sizable—is
somewhat muted by the recent currency depreciation against the
U.S. dollar, which implies a smaller oil price decline in domestic
currency. In oil exporters, real incomes and profits generally
decrease. Much will depend, however, on whether governments, which
typically accrue most of the net oil revenue, will adjust spending.
In countries with buffers, spending adjustment can be gradual, which
would limit the negative impact on incomes and activity. But recent
developments in Russia illustrate the potential for a greater impact
in oil exporters where macroeconomic policies cannot afford to
mitigate the negative growth impact.
1This box draws on the blog by Rabah Arezki and Olivier
Blanchard (2014), “Seven
Questions about the Recent Oil Price Slump,” posted on
December 22, 2014. |
Source |