WASHINGTON (Reuters) - The recent drop in oil prices should persist, helping to boost global economic activity by up to 0.7 percentage points next year, two senior IMF economists wrote in a blog on Monday.
Today the World Bank scaled back it's forecast of global growth in 2015, from 3.4% to 3.0%. What might explain the lower forecast?
Consider two hypotheses:
1. Oil prices are falling because of supply improvement such as fracking, and a rebound in Libya after the recent revolution.
2. Oil prices are falling because of a global growth slowdown, perhaps due to tighter monetary policy.
How could we tell which is right? One possibility would be to look at other commodities. Fracking would not be expected to boost the supply of other commodities, but a global slowdown would be expected to reduce demand for other commodities. Here's copper, sometimes called "Dr. Copper" because it has a PhD in predicting movements in global growth:
Of course that's not definitive, but other sensitive commodities are also falling in price. Thus I see the "lower demand" argument as being somewhat more plausible than the "greater supply" argument, at least for the past couple of months. But that's not to say that the supply of oil (and perhaps copper) has not also increased, and indeed I still see little sign of a major economic slowdown. For instance, while equity markets are down today, their absolute levels are still rather high.