What if oil’s fabled bounce never materialises?
For much of 2015, there has been talk of what growth and (perhaps more importantly) inflation might look like when the base effects of a lower oil price work themselves out of the system.
This has, however, yet to happen. Instead of stabilising, oil has fallen fairly steadily throughout the year. While it did rally somewhat from March to April and then again in September, prices are more than 40% lower than when they started the year and continue to plumb new depths – especially in light of the results of the recent OPEC meeting where it was decided that no cuts to output would happen.
Of course, there are countries and companies that benefit from lower oil prices, but for a number of significant players, it will continue to weigh on growth. And, it would also mean that if the correlation between oil prices and inflation, particularly in Europe, holds there would be little recovery in either inflation or expectations of inflation throughout the year. This would, in turn, mean even greater central bank policy divergence between the EU, Japan and, to a lesser extent the UK on one side and the US on the other who has now committed itself to a rate hike cycle.
Indeed, while oil has been the poster child for the decline in commodity prices, similar threads can be seen running through the broader commodities complex. In many sectors, there is little reason to think that commodities are going to suddenly rise significantly from here. As a result, it is likely to be another exceptionally tough year for the companies and countries built on primary industries. And, particularly in emerging markets, like South Africa, where miners are major employers, cuts like those planned by Anglo American for example, will feed through into the broader economy and thus into any growth expectations.