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Oil price slump to boost growth, says IMF
From the Financial Times of Mon, 22 Dec 2014 17:53:21 GMT

The plunge in the price of oil represents a “shot in the arm” for the global economy which could boost overall world economic growth by between 0.3 and 0.8 per cent, according to the International Monetary Fund.

The upbeat conclusions come in a post authored by two of the IMF’s most senior figures — chief economist Olivier Blanchard and head of commodities Rabah Arezki.

While the authors are at pains to stress the numbers are a simulation not a forecast, if comparable numbers are confirmed in the upcoming January forecasts it would represent a sharp turnround in the fund’s outlook for the global economy.

In October, the IMF cut its global growth forecasts by 0.2 percentage points to 3.8 per cent for 2015 on the back of weakness in the eurozone, Russia and Brazil.

The new paper says that while risks to overall financial stability have increased, they “remain limited” with current pressures so far just hitting a handful of oil exporting countries such as Russia, Nigeria and Venezuela. However, it warns that given the interconnected nature of the global financial system “increased vigilance” is needed.

But the relatively optimistic assessment comes with a sharp warning that large changes in prices and increased uncertainties about some firms and countries “can lead to increases in global risk aversion, with major implications for repricing of risk, and for shifts in capital flows.”

Russia’s economy has been plunged into disarray by the combination of western sanctions and the 50 per cent fall in oil prices since June. Some firms with significant exposure to Russia have seen their share prices fall, and the IMF warns that “one cannot completely dismiss this tail risk” to the overall global outlook.

While generally oil importing countries will win from lower prices, and exporters will lose, the paper cautions there important differences between the groups.

In the developed world, Japan and the eurozone, for example will receive a bigger boost to real incomes than the US as they import more oil. But China and India which remain substantially more oil intensive than advanced economies will benefit more from lower prices.

The paper suggests that China’s GDP could jump by 0.4 to 0.7 per cent next year beyond what is already forecast, compared to 0.2 to 0.5 per cent for the US.

Holger Schmieding, chief economist at Berenberg Bank, said that cheap oil was a “game changer” which would boost growth and lower inflation across the western world and many emerging markets as it amount to “a big de facto tax cut”.

He added that beyond the short term impact of leaving consumers with more money in their pockets it could provide a “more lasting boost to the world economy”, boosting productivity and allowing for strong, non-inflationary growth.

But Stephen King, chief economist at HSBC, warned in his recent forecast that assuming lower oil prices are “like manna from heaven” and would necessarily increase growth “may be too sanguine a view”.

“Our latest projections are shrouded in even more uncertainty than is usual. A plunging oil price may help to improve the split between growth and inflation for oil-importing countries but may, simultaneously, increase the risk of deflationary expectations becoming hard-wired,” he said.

The IMF paper cautions that in the eurozone and Japan where monetary policy is already very loose central bank communications will be of absolute importance to avoid a deflationary spiral.

“Lower inflation, which cannot be offset by lower interest rates, is more dangerous. Against this backdrop, use of forward guidance to anchor medium run inflation expectations and avoid sustained deflation is crucial,” they said.

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