DOHA: The GCC is likely to be insulated from the fall in oil prices for three reasons, QNB said in its weekly report released yesterday. Most governments have made significant savings during the last oil boom. Second, in some GCC countries, like Qatar and the UAE, growth is mainly driven by large investments in the non-hydrocarbon sector. Third, GCC countries have low levels of public debt, which allow them to borrow cheaply to finance any short-term deficits in their budgets. As a result, the GCC is expected to grow by 3.4 percent in 2015 despite lower oil prices.
In its recently-published World Economic Outlook, the International Monetary Fund (IMF) expects global growth to pick up only marginally in 2015 to 3.5 percent from an estimated 3.4 percent in 2014. Global growth is expected to be driven by emerging markets (EMs), which are projected to grow by 4.3 percent in 2015. Meanwhile, advanced economies are forecast to grow by only 2.4 percent as the shadows of past crises continue to cloud the outlook. Although growth is expected to be around 3.5 percent, the picture varies by region and country.
The world economy has recently been dominated by two factors. First, the sharp decline in oil prices, which have nearly halved since mid-2014. The fall in oil prices was mostly a result of a supply shock. Shale oil in the United States added 1.4 million barrels per day (bpd) in 2014, which was much more than expected. In addition, Opec decided to maintain its production at 30 million bpd when some market participants expected a cut from the group to rebalance the market.
Second, large movements in exchange rates. Among the advanced economies, the euro and the yen have witnessed major depreciations while the US dollar has appreciated strongly. In EMs, currencies which are linked to the US dollar, such as the Chinese renminbi, have also appreciated against other currencies. The sharp exchange rate movements have been driven by divergent monetary policies around the world. While the US Federal Reserve (Fed) is expected to raise interest rates later this year, the Euro Area and Japan are engaged in large quantitative easing programmes. Along with low oil prices and falling inflation, loose monetary policy in the Euro Area and Japan has pushed more than two dozen central banks around the world to lower interest rates in recent weeks.
The movements in oil prices and exchange rates have important distributional implications. Lower oil prices shift income from oil-exporting countries to oil-importing ones. Exchange rate movements tend to shift growth from countries with appreciating currencies to those with depreciating currencies. The distributional implications of the two forces are likely to dominate the global picture, creating winners and losers in the world economy.
The US is losing competitiveness from the large appreciation of the dollar. Since June 2014, the broad real dollar index has gone up by 11.5 percent, hurting US exports and corporate profits. On the other hand, lower oil prices are expected to benefit the US economy by increasing the income available to consumers to spend on non-oil items. The US economy is also likely to benefit from the strong performance of its labour market. As a result, the IMF expects US growth to reach 3.1 percent in 2015, compared to 2.4 percent in 2014.
The euro area is possibly the largest beneficiary from the distributional effects of lower oil prices and exchange rate movements. The region is an energy importer and has therefore seen real incomes being boosted by lower oil prices. Furthermore, the euro has depreciated by around 23 percent since March 2014, benefiting the region’s exports. However, the risk of deflation is still high (the IMF estimates the probability of persistent deflation in the euro area to be around 25 percent) and the region is still recovering from the legacy of its sovereign debt crisis of 2012. Overall, the IMF expects growth in the euro area to accelerate but to remain weak at 1.5 percent in 2015.
Lower oil prices are also likely to benefit China. But the renminbi, which is managed to remain stable against the dollar, has appreciated against most global currencies, which is hurting Chinese exports. In addition, the Chinese economy is slowing down as the authorities attempt to change its growth model from an economy driven by investment to one led by consumption. “We expect growth to slow to stabilise around 7 percent in 2015 (from 7.4 percent in 2014) in line with the government’s target. The slowdown in the Chinese economy and soft commodity prices are having adverse effects on other EMs, especially Brazil and Russia,” the QNB report said.
The Peninsula
