The FINANCIAL — The sharp plunge in crude oil prices has boosted the outlook for US growth in 2015 but increased the uncertainties. Growth is likely to be stronger, but by how much will be partly determined by changes in personal savings and the likely slowdown in oil and gas production.
However, inflation will plummet, at least in the short term. How the Federal Reserve responds to this mix of faster growth and falling inflation is another uncertainty, but we think it will delay any rate hikes until the second half of the year, when policymakers can be sure inflation has truly bottomed and deflation is not a threat for the economy.
If crude trades around USD50-60 a barrel for a sustained period, US GDP growth will probably be higher this year than in 2014. Real household income will rise faster than expected as fuel costs fall. Consumption spending is likely to increase, generating more business profits and jobs, which would further boost consumer spending.
But there are already signs that lower oil prices will curtail US petroleum production. The number of rigs drilling for oil peaked in September 2014, just one month after prices started their decline. In 2010, at the beginning of the boom in US oil production, there were only 400 rigs in operation but, as crude prices jumped, by 2014 the number quadrupled to 1,600. Now, if prices stay around USD50-USD60, the total could halve during 2015.
The US Energy Information Administration suggests that at USD50-USD60, US shale oil production could decline as much as 10 per cent this year. The growth of global production from other oil sources is also likely to slow because the marginal cost of exploration and drilling makes many projects unviable.
As the growth of supply slows, the oil price could rebound, but how quickly and to what extent is unknown – thus increasing the uncertainty about US GDP growth in 2015.
We expect growth to average 2.8 per cent this year, up from an estimated 2.4 per cent in 2014. With lower oil prices, we have raised our expectations for consumption spending growth to 2.9 per cent.
But while higher consumer spending will translate into faster GDP growth, there are offsetting factors. The slowdown in the growth of oil production should mean a deceleration of petroleum exports. Also, we no longer expect a rise in reserves in 2015 because lower prices make it less attractive to add to stockpiles.
With more gasoline price declines possible, we now expect consumer-price inflation to be close to zero in 2015 compared with previous expectations of a 0.5 per cent increase.
Importantly, inflation for personal consumption expenditures could decelerate from last year’s 1.3 per cent to 0.4 per cent which would make 2015 the fourth consecutive year it had fallen short of the Federal Reserve’s 2 per cent target rate.
By spring, the year-over-year PCE inflation rate could be close to 0.1 per cent – low enough to persuade the Fed to maintain an accommodative policy stance through mid-year and hold off any increase in the federal funds rate until September, when it can be sure inflation is beginning to rise again.
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