Lower Oil Prices Could Give Europe A Big GDP Boost

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A new Macroeconomic Outlook report from Intesa Sanpaolo argues that oil prices below $60 a barrel will add up to 0.4% economic growth to oil importing Euro area nations.Intesa Sanpaolo analyst Luca Mazzomo also points out that there are likely to be positive secondary effects that ripple through oil importing economies for some time even if prices begin to move back up in a few months.

Lower oil prices will increase GDP for advanced economies by a net 0.3-0.4%

Oil prices began trending down over the summer, but the sell off intensified into a frenzy in the fourth quarter. Compared to the firm’s September scenario when prices were forecast to remain roughly stable at prices close to those in mid-2014, the drop in crude prices to date amounts to a 28.3% drop in average 2015 terms. The alternative scenario of a deeper fall to $60 seems more and more likely, at least for the first half of next year. Relative to net oil imports in 2013, lower oil prices at the 28.3% level implies savings on imports at current prices of 0.4-0.6% of GDP for most first world nations, increasing to 0.6-0.8% in the $60 scenario.

Of note, the actual impact on GDP will be somewhat less because of the contraction of exports to producer countries, guesstimated at 0.1-0.2% of GDP. This means the net effect from the drop in oil prices alone will total to 0.3-0.4% of GDP for the three major economies of the euro area, and for the U.S. and China.

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Lower oil prices could be even more beneficial for large importers Spain (and Japan). That said, the benefit will be minimal for the United Kingdom as it doesn’t import very much oil.

Lower oil prices – Second round effects

Mazzomo explains how “second round effects” work: “The domestic advantage tied to less burdensome energy imports initially consists almost exclusively of stronger savings for households (lower fuel expenses) and enterprises (smaller intermediate costs, higher profit margins). The decline in imports will translate in part into stronger nominal GDP growth, and in part into lower consumption at current prices.”

He argues that taken together with higher profit margins for businesses, freeing up purchasing power would lead to positive second-round effects on domestic demand, especially in terms of increased consumption and investments. Mazzomo also points out that because of the “high tax rates on fuels, the effect of the decline in quotations is diluted in terms of final prices: in 2009, for instance,  the price drop transfer amounted to 30-40%.”

After making the calculations, he sees a 0.2-0.3% benefit to GDP due to second round effects, possibly extending through 2016.

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