Oil slide to give global growth a push

Singapore

SINKING oil prices may spell gloom for producers but may be just what global growth needs.

As oil prices sank below US$80 a barrel for the first time since 2010 on Thursday, observers say the slide in oil prices could lend an unexpected boost to the world economy's still fragile growth, with Asia's energy importers most likely to benefit.

Brent crude oil prices fell further from a four-year low, after the Organization of the Petroleum Exporting Countries (Opec)'s latest monthly report this week forecast that demand for Opec oil will drop to 29.2 million barrels per day (bpd) in 2015, about one million bpd less than what it currently produces.

The group meets in Vienna on Nov 27 to discuss whether to respond to what has been a 30 per cent slide in oil prices over the last five months by cutting output for the first time since 2008's global financial crisis. But Saudi Arabia - the world's largest oil exporter - has given no indication of whether it intends to cut production in the face of a growing oil glut.

While some read weak Chinese economic data released on Thursday - factory expansion slowed and investment growth was close to 13-year lows - as reinforcing how slower economic growth in emerging economies is crimping energy demand, others saw a silver lining.

An International Monetary Fund staff note, released early Thursday morning ahead of this weekend's G-20 Leaders' Summit, said that while weaker than expected economic activity has been one of several factors behind oil prices' sharp fall, "its impact on prices has initially been muted by precautionary demand and the restocking cycle".

Rather, in light of the greater oil supply, due to higher-than-expected production in non-Opec countries, led by shale oil in the United States and recovering output in Libya, the decline in prices should serve to boost global growth, the note said.

ABN AMRO analysts too, think tumbling oil prices could bring a "welcome boost for the fragile global economy", estimating in a note earlier this week that the recent US$30/barrel price fall could contribute about one per cent to global growth.

Lower oil prices shift wealth from oil exporters to oil importers, which tend to be more prepared to spend the capital gained, they said.

Speaking last week about long-term economic growth drivers, Monetary Authority of Singapore (MAS) managing director Ravi Menon noted also that the world's largest economies - the US, Japan, China and India - are among the largest net importers of oil. "Cheaper and more plentiful energy is akin to a supply-side boost to these economies," he said.

Without extrapolating too much from the recent fall in oil prices, he said that a "gentle, secular decline in the real price of oil is not an unrealistic assumption that, if true, should be a boon to global economic growth".

In this region, Morgan Stanley's Asean research analysts estimate that Thailand stands to gain most from falling oil prices, given its dependence on road rather than rail transport and the high proportion of oil in its energy consumption basket.

The other net oil importers - Indonesia, Singapore and the Philippines - follow, but Malaysia's small oil trade surplus could make falling oil prices a slight negative, a recent report said.

While Singapore may not be the biggest beneficiary of falling oil prices in this region, Bank of America Merrill Lynch economist Chua Hak Bin estimates that a 10 per cent fall in global oil prices could lift GDP growth here by about 0.1 percentage point.

Credit Suisse economist Michael Wan thinks that while the direct impact of lower oil prices on growth will be relatively small, the second-order impact from stronger global demand, such as through a boost in disposable household incomes in the US, could be "quite powerful" to the extent that it leads to stronger demand for Singapore's exports.

Barclays economist Leong Wai Ho thinks that Singapore stands to benefit mainly from a lower import bill for crude that will eventually mean lower inflation, as lower oil prices pass through to electricity prices with a three-month lag. "This reduces the upward pressure on core inflation, arising from tight labour conditions. It is a timely blessing for us," he said.

But the economists say any impact on inflation is likely to be insufficient to shift the central bank's position of allowing the Singapore dollar to appreciate against a basket of trading partners' currencies.

The MAS is likely to continue focusing on core inflation, which is driven more by wage cost pressures shaped by the tight domestic labour market, rather than energy costs, said Dr Chua.