Does Oil Upside Cancel Europe Downside?

May 25th, 2012 at 3:34 pm

So I go to get myself a cup of coffee and a colleague asks me, “In terms of the impact on the macroeconomy, will the boost from lower oil prices offset the contagion from European recession?”

Lots of moving parts and unknowables, of course, but if the decline in oil prices sticks and Europe doesn’t unfold in the worse case scenario, then, sure.  But that’s a lot of ifs.

A barrel of oil is down about $20 bucks since March; gas prices, on average, are down about $0.30/gallon since their April highs.  OPEC’s kicked up production a bit, Libya’s gotten back online more quickly than expected, and Middle East tensions have trailed off a bit.  At the same time, sluggish US demand has helped lower price pressures as well.

The rule of thumb is a $10 decline in a barrel of oil that persists for a year boosts GDP by about 0.2%.  So we’re at about 0.4% if this sticks.

The OECD predicts Eurozone slows from crawling forward to crawling backwards this year–recent events, or non-events, really (more bumbling towards austerity), led them to take down their 2012 forecast from 0.2% growth to 0.1% contraction.  Let’s just call that zero.

Finally, Ezra linked to this in the WSJ:

For every one-percentage-point decline in euro-area growth, history suggests growth in the rest of the world will take a 0.7% hit, “with the U.S. seeing a somewhat smaller decline than other parts of the world,” say J.P. Morgan economists, who forecast a 2% hit to euro-zone GDP if Greece leaves the euro.

So, putting all this stuff together, we could get 0.4% extra growth from oil, which would more than cover the slowdown the OECD predicts in Europe.  But worse case scenario, a 2% percent hit to the euro-zone would perhaps shave a point off of US GDP growth.  Maybe the oil boost reduces that by half, so we’re down about 0.5%.  Not good, but not recessionary.

OK, coffee break over.

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One comment in reply to "Does Oil Upside Cancel Europe Downside?"

  1. CIP says:

    Sounds pretty optimistic for a “worst case” scenario, especially if Spain is already hinting at bank runs.