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Friday, March 29, 2024

Cheap oil  dims global recovery

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PARIS—Lower prices at the pump may be pleasing to American and European consumers, putting a breeze in the sails of a limp economic recovery, but the plunge in crude prices has now become a threat to global recovery.

“We are in a situation today where there can only be bad news in the short term,” said Jean-Michel Six, chief economist for Europe, the Middle East and Africa at the ratings agency Standard and Poor’s.

That pessimism is at odds with many delighted consumers, who are suddenly left with spare money in their pockets after paying less for gas and heating oil. This has a non-negligible impact on growth.

In Germany, for example, “of [the] growth of around 1.5 percent in 2015, around four tenths of a percentage point is due to the price of oil,” said Ludovic Subran, chief economist at Euler Hermes. “It is a real rebound in consumption.”

But the past few months have been trying for the countries that produce oil and other commodities, the prices of which have slumped as demand has slowed in China—the motor of global growth in recent years.

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And the longer prices stay low, the more they will feel the pain as many rely on export revenue to fund social benefits.

“…financial strains in many oil exporters reduce their ability to smooth the shock, entailing a sizable reduction in their domestic demand,” the International Monetary Fund said last week in its latest update to its World Economic Outlook report.

The drop in prices for oil and raw materials “is hitting world trade hard,” said Six.

World trade declined 0.1 percent in November from October, according to estimates from the Dutch government’s economic policy analysis unit. A less volatile measure found trade growth slowed to 0.8 percent in the three months to November from 1.7 percent in the three months to October.

The reason is simple: with less revenues, commodities producing countries have less money to import goods.

Demand from these commodity producing nations had helped support Europe and the United States after the global financial crisis in 2008, but is now shaping up to be a drag.

“The longer the oil counter-shock lasts, the more the winners and losers will diverge, whether it be in terms of countries or sectors,” said Surban.

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