Share this:

Like this:

Like Loading...
" />
Published On: Tue, Jan 27th, 2015

Oil at $48, ‘Global economy facing strong headwind’

Share This

ngozi-okonjo-iweala-11By Ese Awhotu

The year 2015 must be the “year of action” when policymakers redouble their efforts to tackle deep-seated economic weaknesses and show greater political leadership on infrastructure investment, trade agreements, and climate change, IMF Managing Director Christine Lagarde said.

She told a Washington audience the global economy is facing strong headwind despite the boost from positive factors such as cheaper oil and stronger U.S. growth.

“More than six years after the Great Recession, too many people still do not feel the recovery. This is why we need a decisive push for structural reforms to boost current and potential growth over the medium term,” she told the Council on Foreign Relations, adding that good teamwork and strong leadership will be needed.

Lagarde said the global economy will face in 2015 three major policy challenges that will require decisions based on political courage, decisive action, and truly multilateral thinking: boosting growth and employment; achieving more inclusive, shared growth; and attaining more sustainable, balanced growth. She noted that these pivotal issues are deeply interconnected and mutually dependent. “All are important, all demand strong leadership, all require cooperation.”

She said the drop in oil prices is a welcome shot in the arm that boosts consumers’ purchasing power in oil-importing countries, and the U.S. economy should strengthen further this year, largely due to more robust household spending.

But lower oil prices and U.S. growth are not a cure for deep-seated weaknesses elsewhere, Lagarde cautioned. “Too many countries are still weighed down by the legacies of the financial crisis, including high debt and high unemployment. Too many companies and households keep cutting back on investment and consumption today because they are concerned about low growth in the future.”

Lagarde said world growth is still too low, too brittle, and too lopsided, and stressed there are significant risks to a global economic recovery. They are; Emerging and developing economies could face a triple hit of a strengthening U.S. dollar, higher global interest rates, and more volatile capital flows; The euro area and Japan could remain stuck in a world of low growth and low inflation for a prolonged period; and there are increased geopolitical risks.

These risks require a powerful policy mix that can strengthen the recovery and provide better employment perspectives for citizens worldwide, Lagarde stated. “Accommodative monetary policies remain essential. Fiscal adjustment must be as growth- and job-friendly as possible. And above all, policymakers will need to finally step up structural reforms,” Lagarde said.

“This economic mantra, support demand, growth, and structural reforms, are not new, but now takes on increased urgency. And it places increased emphasis on political leadership.”

The immediate test for many policymakers is the impact of lower oil prices, Lagarde observed. Not so much for oil importers, for whom the windfall provides an opportunity to strengthen their macroeconomic frameworks and may help in alleviating inflation pressures. By contrast, oil exporters need to cushion the shock on their economies.

In the euro area cheaper oil is contributing to a further decline in inflation expectations, which increases the risk of deflation and bolsters the case for additional monetary stimulus. Most importantly, Lagarde added, the drop in oil prices also provides a golden opportunity to cut energy subsidies and use the savings for more targeted transfers to protect the poor.

“2015 must be the year of action,” Lagarde said. “This means removing deep-seated distortions in labor and product markets; it means revamping creaking infrastructures and building new ones; it means pressing ahead with reforms in education, health, and social safety nets. It also means unleashing the economic power of women.” She said infrastructure investment, where it is carefully chosen and efficient— is a potential game changer. Lagarde noted IMF research showing that increased public infrastructure investment raises output in the short term by boosting demand and in the long term by raising the economy’s productive capacity.

Another potential game changer is unleashing the economic power of millions of women who are currently locked out of the labor market. “Excluding these women is not just morally wrong, but it is bad economics,” Lagarde said.

Trade liberalization could help leverage gains from structural reform, she stated. After years of slowing growth in global trade, 2015 could be a make-or-break year for negotiations on an ambitious trade deal.

The Great Recession had shown that sustainable economic growth was not feasible without a sustainable financial sector, Lagarde observed, adding it is therefore critical to complete the agenda on financial sector reform.

“There has been progress, especially on banking regulation and to a lesser extent on addressing too-important-to-fail financial institutions,” she said. “The big challenge now is to implement reforms and improve the quality of supervision.”

Lagarde noted that in 2015 a major United Nations conference will seek to adopt a new set of Sustainable Development Goals, and global leaders will also aim for a comprehensive climate change deal that cuts carbon emission

Meanwhile, Brent crude oil prices traded near $48 per barrel on Tuesday, down nearly 60 percent since last June on ample global supplies and a decision by OPEC to keep its production ceiling unchanged.

OPEC’s largest producer, Saudi Arabia in November refused to cut its output to arrest the price slide and decided instead to focus on market share.

Saudi Aramco Chief Executive Khalid al-Falih, speaking at a conference in Riyadh, did not specify which projects or contracts would be affected by the low oil prices.

“We will have to adjust to the realities of today. We will push some projects into the future, we will stretch some of them, we will renegotiate some contracts,” Falih said.

“I think we got spoiled with $100 oil and we were focused on building capacity and we lost focus on fiscal discipline.”

Reuters reported last week that Aramco had asked oilfield service companies for discounts in the wake of the oil price slide.

Falih said the imbalance in the oil market had nothing to do with Saudi Arabia, and a fair price is what would ultimately balance supply and demand, a sign that Riyadh is sticking to its strategy of allowing the market to stabilise itself.

“Saudi Arabia has a policy, the policy is set by the government through the Ministry of Petroleum, and they have said that Saudi Arabia will not single handedly balance the market,” he said.

“The math will tell you that our exports… are gradually declining. So the reason for the imbalance in the market absolutely has nothing to do with Saudi Arabia.”

Saudi Arabia pumped 9.61 million barrels per day of crude in November and exported 7.3 million bpd.

Asked what a fair price for oil is, he said: “It will be the price that ultimately balances supply and demand. I don’t think anybody, no single person, can dictate what that price is. I would be foolish if I did that.”

Aramco has already invested $3 billion in developing its unconventional gas resources and has earmarked an additional $7 billion, he said.


Leave a comment

XHTML: You can use these html tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

%d bloggers like this: