The recent drop in oil prices has become a major new source of uncertainty for the global economy and policymakers, but economists aren’t expecting falling crude prices to derail current policy trajectories on either side of the border.
In a new report, economists at Desjardins Group consider the impact of falling oil, and gasoline prices, on U.S. monetary policy. “The astonishing decline in gas prices, with the average U.S. price-per-gallon going from US$3.63 in mid‑2014 to less than $US2.80, is applying downward pressure on inflation,” it says. And, it wonders whether forecasts for higher U.S. interest rates in mid-2015 can withstand such a weakening of inflation.
“If the only effect of plunging gas prices was weaker inflation, the answer could be no,” it says. “However, the plummet in gas prices is also a major stimulus to the U.S. economy,” it says, noting that the drop in gas prices represents potential annual savings of around US$120 billion, or 0.7% of GDP.
Moreover, it notes that central banks usually disregard temporary movements in inflation caused by external factors. “The annual inflation rate may be weak in mid‑2015, but the temporary effects of slumping gas prices will be poised to dissipate. Federal Reserve leaders will therefore base their decisions on the job market’s performance and real internal inflation pressure,” it says.
As a result, it concludes that, despite a weaker short-term inflation outlook, “we still expect U.S. key rates to start increasing around mid-2015, as everything points to the economy and the job market to continue advancing at a good pace.”
Similarly, a new report from TD Economics considers the impact of falling oil prices on the finances of the Canadian government. It notes that the government posted a modest deficit in the second quarter of fiscal 2014-2015, coming off a modest surplus the prior quarter.
TD says that the deficit occurred despite higher revenues, lower program expenses, and declining debt charges; which, it says, signal “considerable positive fiscal momentum” for the second half of the year. “However, falling oil prices have more recently muddied the near-term picture, as lower profits in the energy sector can be expected to weigh on corporate income tax revenues in particular,” it says.
Nevertheless, TD Economics says that it believes oil prices will stabilize in the first half of 2015 and rebound modestly after that. “As a result, the negative impact of falling oil prices on federal revenues can be expected to be relatively moderate and short lived,” it says.
Moreover, it says that there’s a certain amount of flexibility in the federal fiscal projections. “Keep in mind that the government brought revenues down $3 billion each year of the projection in adjusting for broader risks. This additional prudence should be sufficient to keep the feds in the black beginning in fiscal 2015-2016 as planned,” it concludes.