Economics: A New Tailwind For The Global Economy

(Drivebycuriosity) - There is a lot talk about the slowing global economy and some scaremongers already predict a recession for 2019. But the gloomy comments all overlook one important fact. Oil prices dropped almost 40% since October. The sharp oil price drop works like a global tax cut because consumers have more money to spend for other goods & services and companies have lower costs.

(commodity)

Nine out of ten of the U.S. recessions since World War II were preceded by a spike up in oil prices, wrote Prof. James D. Hamilton, University of California, San Diego ( pdf econweb). Another study by Prof.  Hamilton shows that the oil price shock from 2008 - from summer 2007 through July 2008 the oil price spiraled from about $50 to $147 -  turned the economic slowdown into a severe recession (econbrowser).: "The oil price increase over 2007:H2-2008:H1 should be regarded as a key development that turned the slowdown in growth into a recession" (archives).

(macrotrends)

The chart above shows that all 3 US recessions since 1990 were preceded by a spiking oil prices. In 1990 the oil prices suddenly jumped from $33 to $75 because of the first Gulf War. In the year 2000 the oil price again rallied from about $33 to $75 and in 2007/02008 the price of oil spiked from $72 to $148. I assume that the current weakness in Europe & China is at least aggravated by the oil price rally from spring 2016 through this fall - when oil prices tripled - because the more expensive oil sucked more money out of the global economy and the Federal Reserve and China`s monetary authorities had to fight the accelerating inflation caused by jumping oil prices.


Now we have the opposite situation: Falling oil prices - even though the US economy is still strong (unemployment rate & weekly jobless claims of record lows; GDP growth in Q4 about 2.7% frbatlanta.org ) and China is still growing about 6%. Oil prices will stay subdued in 2019 & 2020 thanks to the rising US production & fracking. Cheaper oil will translate into lower inflation rates - towards 2% in the US - which will allow the Federal Reserve to slow her interest rate hikes (maybe even to pause them) and will give China´s monetary authorities the chance to reduce interest rates. These changes - together with the reduced US taxes thank to the recent tax reform - could rekindle global economic growth in 2019. The pessimists will be disappointed.