By June 13, 2016 Read More →

Oil prices drop may even curb global growth: ECB

Oil prices drop not compensated by higher household consumption

Oil prices drop

Analysts were expecting the oil prices drop to be offset by increased business and household spending which did not happen as households increased their savings and did not adjust spending patterns. Anadarko photo.

FRANKFURT, June 13 (Reuters) – The oil prices drop over the past two years will add less to global growth than earlier thought and the overall impact could even be negative, the European Central Bank said on Monday.

With oil prices falling from around $110 per barrel in mid-2014 to $50 per barrel now, many had expected a one-off boost to global growth from higher consumption as households and businesses spend less on fuel, realizing an income gain.

But the positives have so far been limited while the adverse impact on net oil-exporting countries has been severe, accompanied by negative spillovers to other emerging market economies, the ECB said in a bulletin article.

“Taking the example of the United States as one of the largest net oil importers, the benefits for consumption of lower oil prices have been smaller than initially anticipated and largely offset by sharp falls in energy-related investment,” the ECB added.

Initial oil price falls were driven by over-supply, normally a boost to global growth, but weak demand has also contributed more recently, a drag on the global economy, the ECB said.

“Assuming that, for example, 60 percent of the oil price decline since mid-2014 has been supply driven and the remainder demand driven, the models suggest that the combined impact of these two shocks on world activity would be close to zero, or even slightly negative,” the ECB added.

Consumption failed to benefit as households increased their savings and many did not expect the fall to persist so they did not adjust their spending patterns.

But in the case of exporters, the shock was unexpectedly big with oil prices falling below fiscal break-even levels, resulting in significant GDP declines. (Reporting by Balazs Koranyi; Editing by Andrew Heavens)

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