Tumbling oil prices to give lift to UK economy

Chris Papadopoullos
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As oil tumbles to another five-year low, the consequences for the global economy will be far-reaching

Plummeting oil prices could give a major boost to the UK’s economic growth and provide a turnaround in fortunes for the Eurozone.

Consultancy group Oxford Economics is forecasting the UK economy to grow by 2.6 per cent on average over 2015 and 2016.

However, if oil prices average as low as $40 a barrel over those two years, growth could top 3.2 per cent. Drops to $60 and $50 would also lift growth.

Brent crude oil – extracted from the North Sea – edged down to $66 a barrel yesterday. It was just shy of $115 a barrel in June.

Oxford Economics believes that an average price of $64 dollars a barrel in 2015 followed by a steady recovery to $86 by 2019 would increase global economic output by 0.4 per cent by 2017. It may even be enough to revive the weak Eurozone economy, which could be boosted by 0.3 per cent by 2017.

The Organisation of Petroleum Exporting Countries (Opec), which includes Iran, Kuwait, Saudi Arabia and the United Arab Emirates (UAE), would suffer, however, as their 2017 output would be 0.7 per cent lower than planned.

Among developed economies, Hong Kong is set to benefit the most if oil prices fall to $40 per barrel, with an extra one per cent of economic growth per year over 2015 and 2016 – up to 3.9 per cent from 2.9 per cent.

At the other end of the spectrum are Russia, Saudi Arabia and Norway.

Russia’s economic growth has already been hit by economic sanctions. It relies on oil as a major export and generator of state revenues. Russia’s economy could contract by 2.5 per cent if oil drops to $40 a barrel while Saudi Arabia and Norway would stagnate.

Cheaper oil would also weigh down on inflation in the UK and could turn negative if oil prices dropped below $60 a barrel.

This would likely prevent the Bank of England from raising interest rates from their historic lows.

Portugal, France and Spain could see annual inflation as low as minus two per cent over the next two years if oil averaged at $40 a barrel.

An average oil price of around $60 over the next two years would also have an impact on current accounts – exports minus imports. Taiwan, Hungary and Thailand all have their current account balances boosted by over two per cent of GDP.

“A fall in the price of Brent crude to $40 per barrel remains unlikely in our view, yet is not beyond the realms of possibility,” report author John Bulford told City A.M.

“Our model highlights some real vulnerabilities in a number of countries, not least of which is Russia.

“In general, however, such a fall in the oil price would provide a welcome boost to the global economy,” Bulford added.

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