Tumbling oil prices were supposed to boost growth in a host of major oil-importing economies. It isn’t necessarily working out that way.
Some governments have moved already to shore up their revenues by raising gasoline taxes or cutting fuel subsidies. At the same time, falling oil costs have pumped up deflation fears across Europe and Japan, adding to the risk that consumers and businesses will hold back on spending and investment, dragging on growth.
China has raised fuel-consumption taxes by 50 percent since November. Gasoline prices have soared in Indonesia as the authorities eliminated subsidies altogether. High taxes in Japan mean pump prices have fallen only 15 percent in the past six months, compared with a 40 percent decline in the U.S. Taxes also blunt the fall in Europe: premium gasoline prices have fallen 29 percent in the U.K. and 32 percent in France.
Brazil has trimmed subsidies and raised taxes to shore up its deteriorating finances. As a result, some consumers there are paying an extra 7 percent or more at the pump than they did last week.
Oil prices posted their largest one-day drop in two months Wednesday after U.S. data showed crude supplies near 80-year highs. U.S. crude oil for March delivery sank 8.7 percent to $48.45 a barrel. Brent, the global benchmark, declined 6.5 percent to $54.16 a barrel.
Past oil-price declines have often signaled a global slowdown as demand for crude collapses. But they also have often been followed by a ramping up of growth. The 60 percent fall in oil prices between November 1985 and March 1986 helped fuel five years of global growth that averaged near 4 percent.
A raft of economists and policy makers in recent months has shrugged off concerns that falling oil costs might be a harbinger of a slowdown, arguing the windfall for oil importers would more than offset the hit major crude exporters would take as their revenues tanked.
As recently as early December, the International Monetary Fund said that cheaper energy could add nearly a percentage point to gross domestic product for most advanced economies. European Central Bank President, Mario Draghi, has called the effect of falling oil prices “unambiguously positive.”
To be sure, there are signs oil’s fall is trickling into some economies.
The IMF cited the oil-price decline as a primary reason for an upgrade in its forecast for the U.S. economy last month.
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Cheaper fuel also has provided a boost to retail sales in the eurozone. Spending by households in France, for example, rose by 1.5 percent on the month in December, according to data released Wednesday. Sales across the eurozone were up 2.8 percent in December compared with a year earlier.
India’s purchasing manager’s index, a gauge of factory-floor conditions, has improved in recent months, potentially reflecting better profit margins at local companies because of lower oil costs. In Japan, a weaker yen and cheaper fuel are giving many economists reason to raise their growth forecasts. And more potential benefits could emerge.
“There’s been insufficient upward revision of forecasts outside the U.S. due to energy,” said Adam Posen, president of the Peterson Institute for International Economics. “There are still going to be positive effects from the shock, they just haven’t shown up yet.”
But with more data pouring in from around the world, the impact is hardly uniformly upbeat.
The risk of a deflationary mind-set among consumers and businesses has emerged as a major challenge in the eurozone and Japan, both of which are struggling to avoid falling back into recessions. Low or falling prices for goods and services can restrain consumer spending, deter business investment, cap wages and add to debt headaches.
Oil is a major driver of that slowdown in inflation—the biggest since the depths of the financial crisis more than five years ago. Last week, the European Union’s statistics agency reported consumer prices were 0.6 percent lower in January than a year ago.
“If you think that prices are going to stay low, that will dramatically affect your behavior,” said Ayhan Kose, lead author of the World Bank’s flagship Global Economic Prospects report.
The more oil prices lower inflation expectations in Europe and Japan, the less effective new central bank easy-money policies meant to spur growth will be, Kose said. “It will require more to deliver the same impact, and the impact will be less potent,” he said.
Both the IMF and the World Bank lowered their outlooks for growth in many major economies outside the U.S. last month. Political and economic headwinds are offsetting any gains seeping in from cheaper energy costs.
In Italy, Japan, France, South Korea, China and other major oil importers, consumer confidence is waning, according to Nielsen ’s latest report on sentiment around the world. As consumer optimism falls, people are more likely to save than spend and businesses grow wary of new investments.
“There’s a lot of uncertainty around the strength of economies around the world,” said Louise Keely, senior vice president at Nielsen and president of the Demand Institute, a non-profit think tank that studies consumer behavior. “That means the drop in fuel prices doesn’t necessarily flow through into consumer sentiment.”
Hannes Baumgartner, a director of a trucking division at Italy-based transport and logistics company Fercam AG, said falling fuel prices have cut the company’s costs but aren’t likely to change its investment strategy. “We’re mostly worrying about the volatility in prices,” he said.
Japan’s chemical industry, a big user of imported oil, welcomed the cheaper input costs. But many companies say cheaper oil might push customers to demand discounts for items like plastics, tires, synthetic fabrics and detergents.
“Too much volatility isn’t desirable,” said a spokesman for Sumitomo Chemical Co.
Price growth is also anemic in China, reflecting weak consumer and business confidence. “The lower oil price is bringing more deflationary pressure rather than helping the economy,” said Vincent Chan, a research analyst at Credit Suisse .
Big Chinese companies are hobbled by overcapacity—the result of years of profligate investment—and are unlikely to boost spending on plants and other capital outlays just because energy prices fall, said Chan.
