Weekly Economic Briefing

The good oil...

21 October 2014

Global Overview

  • Brent oil prices have plunged by nearly 30% over the past four months, while forward prices have also shifted down significantly.
  • Both supply and demand factors have contributed to the decline in oil prices. Oil production is increasing, particularly in the US and Libya, while Saudi Arabia has so far resisted production cuts. Meanwhile, global industrial production has weakened in recent months, weighing on oil demand.
  • If it persists, lower oil prices will provide a welcome boost to economic activity in oil importing countries, with the biggest benefits likely to be seen in countries like India, Korea and Taiwan.
  • Although falling prices will also be supportive of growth in the United States, the positive effects will be smaller than in the past because net oil imports have declined following the tight oil boom and the economy has become less oil-intensive.
  • The negative effects on oil exporting economies will feed through more slowly, eventually weighing the most on the Gulf states, Venezuela and Russia.
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US

Lower oil prices act like a tax cut for consumers and producers but the benefits of lower prices will be smaller than in the past due to the declining petroleum trade deficit.

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UK

Lower oil prices should boost the UK economy as weaker inflation supports squeezed households. While this will weigh on direct tax receipts, the overall impact on the Treasury should be positive.

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Europe

Falling oil prices provide a dilemma for the ECB. While they should support activity, there will be trepidation around further disinflationary forces in the currency union.

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Japan

Japan’s high energy import bill has dragged the nation into a trade deficit. Thus, falling oil prices should be a benefit, assuming global demand weakness appears only in pockets.

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Emerging Markets

The impact of lower oil prices in emerging markets is mixed. Importers such as Korea and India will benefit but exporters such as the Gulf states, Russia and Venezuela will suffer.

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Standard Life Investments’ Global Strategy team provide regular analysis of the key economic data that has been influencing financial markets.

Available on a weekly basis, the Weekly Economic Briefing takes a detailed look at the global economic issues that have been impacting our investment strategy. The regional approach aims to provide an easy-to-navigate guide to the most recent developments in the global economy.

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