Cheaper oil won’t boost global growth: Moody’s

Moody’s is maintaining its GDP growth forecast for the G20 countries at just under 3% in both 2015 and 2016, which would be broadly unchanged from 2014.

“Lower oil prices should, in principle, give a significant boost to global growth,” says Marie Diron, senior vice president at Moody’s and author of the report.

“However, a range of factors will offset the windfall income gains from cheaper energy,” she says. “In the euro area, the fall in oil prices takes place in an unfavourable economic climate, with high unemployment, low or negative inflation and resurgent political uncertainty in some countries.”

Despite cheaper energy, Moody’s forecasts euro area GDP growth of slightly below 1% in 2015, which would be broadly unchanged from 2014. It then sees euro growth rising to 1.3% in 2016.

Moody’s says that it expects the benefits of lower oil prices to be small in the euro area. Weak demand in the area suggests that companies will have to pass on the lower energy costs, limiting the potential for higher profit margins, it says.

Additionally, high unemployment and low or negative inflation in the euro area are likely to push wage growth lower, dampening gains in real income, Moody’s says. Worries about job security in certain countries could encourage people to save rather than spend, it adds.

The rating agency says that it expects the European Central Bank’s (ECB) quantitative easing programme will have a positive but small impact on the euro area economy, mainly through a further weakening of the euro.

Moody’s global growth outlook is based on the assumption that oil prices will average $55 a barrel in 2015, rising to $65 on average in 2016. It assumes that oil prices will stay near current levels in 2015 because demand and supply conditions are unlikely to change markedly in the near future.

Some G20 countries will benefit from lower oil prices, in particular the U.S. and India, over the next two years through higher consumer and corporate spending.