Falling Energy Prices Likely to Boost GDP


By Bondsquawk

July 17,2012

According to Goldman Sach’s US Economics Analyst by Jan Hatzius, Alec Phillips and Sven Jari Stehn, energy prices have plummeted since April and is likely to give momentum to growth.

According to the report GDP growth could improve by up to ½ percentage point over the next year if the prices are sustained going forward.

This estimate ignores the negative effects from the previous run-up in oil prices that are still in the “pipeline.” Taking these into account suggests that growth might be boosted by around 0.3 percentage point over the next year if the recent drop in energy prices persists. If energy prices rise again going forward, the growth boost will be correspondingly smaller.

However, the Goldman Sach’s report also pointed out that GDP figures might be lower than estimated.

The recent decline in energy prices, however, appears largely due to the economic slowdown that we have observed in recent months. As slower growth would itself lower energy prices—and thus imply a smaller energy price “shock” than the observed decline—the simulations in Exhibit 4 probably overstate the growth boost that can be expected over the next year.

A second concern pointed out by the report is that if oil prices increase going into the future which could slow the boost brought by falling prices.

Another issue is whether the effects of oil price increases and decreases really are symmetric—i.e. whether oil price decreases have the same (absolute) effect on GDP growth as oil price increases. A few researchers have argued that oil price increases— especially from already high levels—tend to be more harmful for growth than subsequent declines.

Given all the possibilities analysts predict a ¼ percentage point increase over the next year with a possibility of ½ percentage increase as well.

The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees.



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