The world is set to witness a new and rare economic phenomenon called ‘transflation’ in 2015 in the wake of tumbling oil prices, economists forecast on Monday.
The steep plunge in oil prices by more than 50 per cent has led the global economy to a scenario of rising gross domestic product, or GDP, growth and falling prices or inflation — a favourable environment for all risk-asset classes, they say.
“In other words, it is a situation of deflationary expansion where inflation/prices fall and GDP expands simultaneously,” economists at Crédit Agricole Private Banking explained.
Globally, this phenomenon has not happened to any noticeable degree in the 20th and 21st centuries, but in the 1800s deflationary expansion occurred during long periods, Dr Marie Owens Thomsen, chief economist, Crédit Agricole, said at a roundtable discussion held in Dubai.
The looming ‘transflation’ will entail higher growth and lower inflation/prices in oil importing countries but pose unique challenges to oil exporting regions.
“In our scenario it will be rather short lived, and 2015 will be the one year during which to take advantage of the unique constellation of stronger growth, lower inflation, and low interest rates,” says Dr Thomsen.
She contends that for the GCC, on the other hand, low oil prices represent a great opportunity to implement deep structural reforms to decrease reliance on hydrocarbon revenues, and take their economies to the next level of their growth trajectory.
According to Dr Thomsen, the current state of deflationary expansion has been rare since the 1800s; so rare, in fact, that it does not have a name of its own.
“We call it ‘transflation’ in order to describe the transformational events that allow GDP to expand and prices to fall simultaneously, and it is the best thing that has happened to the world economy since sliced bread, so to speak.”
The economists argue that lower oil prices, assuming they remain at the new level for some time, constitute a formidable boost to disposable incomes for consumers everywhere and for oil-importing nations in particular.
“Oil exporters look certain to suffer, on the other hand. The net impact on the global economy is likely to be unambiguously positive and allow the return of the deflationary expansion.”
To sum up, 2015 is likely to see an additional half point of GDP growth in the world, taking it to four per cent using PPP- (purchasing power parity) based weights.
“What happens in 2016 will of course also depend on our assumptions regarding the oil price. We have assumed that the oil price will remain on average $ 70/barrel in 2016. If that is the case it will not give the economy any additional impetus that year and we see 2016 world GDP growth falling somewhat as a result. This can be considered as a “neutral” forecast for 2016. Even lower oil prices would boost the economy that year beyond our numbers, and higher oil prices could bring about a sharper drop in GDP growth,” Crédit Agricole analysts said in their forecast.
“For the US we are forecasting a one percentage point acceleration in 2015, which would be a big boost following the deceleration of the same size in 2014. Japan and the Europe are expected to see their GDP growth rates accelerate also by something close to this magnitude. In our scenario, Italy will exit its recession. Brazil and Russia, on the other hand, will see less growth in the coming years than what might have been the case without the large drop in oil prices. Inflation is likely to drop almost everywhere, except for in countries with large currency depreciations.”
Thanks to ‘transflation’, in 2015 monetary policy will remain loose but possibly not as loose as many market participants are currently hoping for.
“Volatility is likely to be greater in 2015 as markets struggle to come to terms with this new environment. Investors who dislike marked-to-market fluctuations would need to adjust their allocations to the new environment. The global political context is also more difficult, in part because of the lower oil price. In this context, we favour core holdings of quality assets, possibly combined with a few opportunistic allocations for those with less risk aversion,” said the forecast.
In bond markets, there will be pockets of opportunities but they will be less and less obvious to the non-professional investor. The next big move in market interest rates is likely to be up, although lower inflation should mitigate this trend. “In terms of currency exposure, macro-economically speaking, we are structurally bullish on currencies of countries that run current account surpluses ,” according to the forecast.
