Economists weigh in on oil prices and an uneven global recovery

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World Bank chief economists, clockwise from upper left: Senior Vice President and Chief Economist Kaushik Basu, Augusto de la Torre (Latin America and the Caribbean), Shanta Devarajan (Middle East and North Africa), Francisco Ferreira (Sub-Saharan Africa), Sudhir Shetty (East Asia and Pacific), Hans Timmer (Europe and Central Asia), Martin Rama (South Asia).


​Lower oil prices are a boon for oil importers around the world. But how well are oil-producing countries adapting to the apparent end of a decades-long “commodity supercycle” and lower revenues? And what does this mean for the global economy?

World Bank economists provided insights on the situation in six developing regions at a webcast event April 15 ahead of the World Bank Group-IMF Spring Meetings. The discussion focused on the challenge of creating sustainable global growth in an environment of slowing growth.

World Bank Chief Economist Kaushik Basu said the global economy is growing at 2.9% and is “in a state of calm, but a slightly threatening kind of calm. … Just beneath the surface, there’s a lot happening, and that leads to some disquiet, concern – and the possibilities of a major turnaround and improvement.”

Among the factors affecting countries around the world is a dramatic fall in oil prices and lower prices for other commodities. Crude oil prices fell 55% to $47 a barrel in early January. The World Bank predicted in January that 2015 would be a “rare case in which all nine key commodity price indices are expected to decline.”

“Overall, the lower price regime that we seem to be going into is good for the world,” said Basu. “It’s going to give a small but clear boost to global GDP.” But some countries could suffer.

Growth is expected to average 3% in the Middle East and North Africa, but that average hides a lot of variation, said the region’s chief economist, Shantayanan Devarajan. About a third of countries in the region are oil importers and will see an uptick in growth. Four oil-exporting countries are in conflict – Iraq, Libya, Syria, and Yemen – and all are in negative growth, and other oil exporters in the region are facing a “substantial” decline in growth rates, according to the latest World Bank Economic Monitor for the region.

The combination of circumstances presents an “unprecedented opportunity” to reform fuel subsidies in the region, which in some countries amount to about 10% of GDP, Devarajan said.

“The MENA region is 3% of the world’s GDP and 50% of the world’s energy subsidies,” he said. “I don’t have to tell this crowd that subsidies have all sorts of corrosive effects going beyond just the fiscal effects: They lead to pollution, congestion, depletion of the water table, and it can be shown that they actually hurt employment growth.”

Lower oil and commodities prices have hurt growth in Africa. The World Bank cut growth estimates from 4.6% for 2015 to 4%, said Chief Economist Francisco Ferreira. According to the latest issue of Africa’s Pulse, lower oil and commodity prices will negatively affect the trade of 36 countries that are home to 80% of the population and 70% of the economic activity in Africa. Nigeria’s relatively diversified economy is expected to rebound in 2016, but  low oil prices will continue to weigh down less diversified oil exporters such as Angola and Equatorial Guinea, said the report.

“Of course, the countries that have lost the most are the big oil exporters,” said Ferreira. These countries have had trade losses on the order of 40% in 2015, and their fiscal systems have suffered “very big shocks” and currency depreciations, he said.
 
“One of our concerns is the impact on the poor,” said Ferreira.
 
Europe and Central Asia is sharply feeling the fallout from Russia’s recession, lower oil prices, and the declining value of remittances into surrounding countries, said Chief Economist Hans Timmer. GDP growth in the region is expected to be flat – largely because of a declines in Russia and Ukraine.
 
“But that’s only a small part of the bad news,” said Timmer. The decline in real incomes in Russia is around 14%, he said. Remittances flowing out of Russia are also declining because of depreciation of the ruble, he said. These income losses come with growing fiscal pressures, job losses in construction and other non-tradable sectors, and banking problems. They are also posing challenges for social safety nets.
 
Asia will benefit the most from lower oil prices. South Asia’s growth is projected to steadily increase from 7% in 2015 to 7.6% by 2017, and it is now the fastest-growing region in the world, according to a new economic report. All countries in the region are net oil importers.

“For the economies of the region, the situation is very good,” said Martin Rama, South Asia chief economist. “This is a good opportunity … the question is, can the region take advantage of this to really go further in the direction of reforming the price of energy in a way that will sustain the growth of the sector?”

Low global oil prices will benefit most developing countries in East Asia and the Pacific, especially Cambodia, Laos, the Philippines, Thailand, and the Pacific Island countries. Fuel exporters, including Malaysia and Papua New Guinea, will see slower growth and lower government revenues, according to the region’s latest economic update.

“The biggest risk this region faces is that the global recovery turns out to be…the new normal in terms of global recoveries,” said EAP Chief Economist Sudhir Shetty.

Latin America and the Caribbean may be the biggest losers from the commodity price downturn. The region has seen growth decelerate since about 2012, said Humberto Lopez, a country director in the region who represented Chief Economist Augusto de la Torre at the event. Average growth in the region has slowed from close to 5% in 2011 to less than 1% expected in 2015. Brazil’s growth is expected to be close to flat this year, said Lopez.
 
A new economic update said the main force behind the region’s growth deceleration was “arguably a negative external shock, mainly stemming from a slowdown in China and a decline in commodity prices.”  Formerly booming investment in the region collapsed, particularly in oil and minerals, as the decline of commodity prices lowered profitability or raised risk. With China growing at a more moderate pace and commodity prices stabilizing at lower levels, Latin America and the Caribbean will need to adapt to a “new normal,” said the report.
 
“This is back to the late '90s, when we didn’t have commodity booms to pull the region,” said Lopez. “The fiscal adjustment that is going to be needed to come to the new normal is going to be very big.”

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