Falling Energy Prices Will Bolster GDP
By Bondsquawk
According to Goldman Sach’s US Economics Analyst by Jan Hatzius, Alec Phillips and Sven Jari Stehn, energy prices have plummeted since April and is likely to give momentum to growth.
According to the report GDP growth could improve by up to ½ percentage point over the next year if the prices are sustained going forward.
This estimate ignores the negative effects from the previous run-up in oil prices that are still in the “pipeline.” Taking these into account suggests that growth might be boosted by around 0.3 percentage point over the next year if the recent drop in energy prices persists. If energy prices rise again going forward, the growth boost will be correspondingly smaller.
However, the Goldman Sach’s report also pointed out that GDP figures might be lower than estimated.
The recent decline in energy prices, however, appears largely due to the economic slowdown that we have observed in recent months. As slower growth would itself lower energy prices—and thus imply a smaller energy price “shock” than the observed decline—the simulations in Exhibit 4 probably overstate the growth boost that can be expected over the next year.
A second concern pointed out by the report is that if oil prices increase going into the future which could slow the boost brought by falling prices.
Another issue is whether the effects of oil price increases and decreases really are symmetric—i.e. whether oil price decreases have the same (absolute) effect on GDP growth as oil price increases. A few researchers have argued that oil price increases— especially from already high levels—tend to be more harmful for growth than subsequent declines.
Given all the possibilities analysts predict a ¼ percentage point increase over the next year with a possibility of ½ percentage increase as well.
7 Comments
This is simply more self serving sell-side tripe. GDP is a measure of spending. If consumers spend less on gasoline and companies spend less on energy, the conventional thinking is that frees money to spend elsewhere and/or improves margins. However, consumers may simply save the money, pay off debt, or purchase other nondiscretionary items such as food, which coincidentally continues to rise in price. Further, there is no indication that companies will redirect any savings into more hiring or production. Oil prices are the tail wagging the dog here; economies are slowing and energy lags, it doesn’t lead. All that is really happening here is a substition effect with the impact on real GDP likely to be nil.
The evidence suggests that spending on food is not especially sensitive to changes in income once it gets above a certain threshold, it’s one of these important items that always needs to be bought that is largely inelastic to income.
The other thing to remember is that the effect on the trade balance. Last I saw the USA remains a net importer of oil. If the oil price drops it improves the terms of trade (i.e. smaller trade deficit) which provides a direct boost to GDP.
(Of course its fair to say its all just accounting mumbo-jumbo)
Gas been $3.61/gallon for the last 5 months where I live….I’m still waiting for those cheaper energy prices….and for some reason, still haven’t figured this out yet, natural gas went UP !!! I thought they had so much, they couldn’t even store it.
Supposedly, the US became a net exporter of fuel for the first time in 60 years, and it was the number one cash export last year.
I wonder if there is any accounting for that change in these assumptions. Seems like falling fuel prices would hurt exports, the trade deficits, etc.
Well then why the Fuck did you just lower your GDP estimate Jan?
My most immediate reaction is: So what?
A growth of GDP due to falling energy prices means nothing for stock prices. Furthermore, the only GDP growth that matters is when employment falls and wages rise, so that consumption gets a “sustainable” boost.
The rest is gimmicks