The December 2014 letter from Rothschild Wealth Management’s offers an overview across a broad range of topics related to economics and investing. Author Kevin Gardiner, a Global Investment Strategist for RWM, is relatively sanguine about the current state of most developed economies/markets including the U.S., and argues that lower oil prices should provide a tailwind to keep the party going for some time yet.

Gardiner anticipates largely clear sailing for U.S. economy over the few months as he sees the American economy as “still firmly in mid-cycle mode.”

Oil Prices

Oil Prices

Lower oil prices will give developed economies a boost

The RWM report notes that lower oil prices will help American consumers and many American businesses. “Lower oil prices offer a further (modest) reason for expecting US growth to continue. Gasoline prices are back below $3 per gallon for the first time since 2010, boosting real spending power and confidence.”

Oil Prices

Lower oil prices are not, however, an economic panacea. Gardiner notes the oil sector is still a big chunk of the American economy, and given that quite a few recent investments in shale extraction in the U.S. are debt financed, some loans will likely need to be written down. Overall though, he says “…lower prices are an added reason for continuing to give US discretionary spending the benefit of the doubt.”

Oil Prices

Gardiner also highlights that inexpensive oil will also help a to support growth across most of the rest of the developed world. A $40 per barrel drop in oil prices, if sustained over a full year, would effectively transfer an amount equivalent to 1.5% of world GDP from oil producers to consumers. He notes that Japan and the euro area will also enjoy improved competitiveness with lower crude prices, especially Japan, where the yen’s real exchange rate is at levels not seen in two decades.

Wage increases are a first sign of a pick up in inflation

Oil Prices

A number of analysts have commented that there are signs of wages beginning to respond to falling unemployment in the U.S. and the UK, and wage increases are a clear sign that an economy is heating up. Gardiner notes that a minor pick-up in wages is all that will be required “for the respective central banks to start nudging policy interest rates higher during the year ahead.”

That said, he doesn’t believe inflation is a problem right now, especially with oil below $65 a barrel. “But it is difficult to see underlying inflation zooming skyward any time soon – and lower oil prices of course mean that headline inflation may fall further first.”

Oil Prices