China slowdown and headwinds from Japan and euro area offset positive momentum in India
Lower oil prices will fail to give a significant boost to global growth in the next two years as the gradual slowdown in China and headwinds from Japan and the euro area hold back economic activity, says Moody's Investors Service in its quarterly Global Macro Outlook report."Lower oil prices should, in principle, give a significant boost to global growth," says Marie Diron, a Moody's Senior Vice President and author of the report. "However, we are not raising our G20 forecast. A range of factors will offset the windfall income gains from cheaper energy. In China, lower energy costs won't stop the ongoing and gradual slowdown in economic activity."
Despite lower oil prices, Moody's has maintained its GDP growth forecast for the G20 countries at just under 3% in both 2015 and 2016, broadly unchanged from 2014.
For China, Moody's expects higher energy taxes and government-controlled prices in some sectors to dampen the impact of lower oil prices.
"While we don't expect cheaper energy to reverse China's economic slowdown, we believe it will reduce the need for stimulus to prevent a sharper deceleration," Ms Diron adds.
Moody's forecasts that China's GDP growth will fall below 7% in 2015, before slipping further to 6.5% in 2016, compared to 7.4% in 2014.
In Japan, lower oil prices will hamper the central bank's attempts to raise inflation expectations. Moody's also expects wage growth to remain low in the next two years, dampening consumer spending. Moody's forecasts GDP growth below 1% in Japan in 2015, rising just above 1% in 2016.
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Moody's global growth outlook is based on the assumption that oil prices will average $55 a barrel (Brent) in 2015, rising to $65 on average in 2016. The report 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.
Among the G20 countries, India is one of the main beneficiaries of cheaper oil. In 2013, the country's oil imports amounted to 8.5% of GDP. Falling oil prices have helped to reduce high inflation, a factor that has constrained economic growth in recent years.
"Lower inflation will increase demand in India, encouraging consumers to spend and companies to invest," Ms Diron adds.
Lower oil prices will give the US economy a boost over the next two years through higher consumer and corporate spending, but will fail to lift global GDP growth. Moody's has raised its 2015 US GDP growth forecast to 3.2% from 3% in the last quarterly report and expects growth to remain strong at 2.8% in 2016.
In the euro area, the benefits of lower oil prices are likely to be small. Moody's forecasts euro area GDP growth of just below 1% in 2015, broadly unchanged from 2014, before rising to 1.3% in 2016. The report says the European Central Bank's quantitative easing programme will have a positive but small impact on the euro area economy, mainly through a further weakening of the euro.
Lower oil prices will hit the G20's major oil producing countries, including Russia and Saudi Arabia.
Moody's forecasts a sharp recession in Russia that will last until 2017. In Saudi Arabia, higher fiscal spending will maintain positive growth and offset the negative effects of lower oil prices.
The report highlights multiple factors that could lead to lower growth in individual countries, but emphasises that few of these risks would, on their own, have a large global impact. These risks include a disorderly financial market response to US monetary policy tightening, a longer than forecast fall in China's property market and heightened political uncertainty and deflation or prolonged low inflation in the euro area.
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