La déflation est une bonne chose pour l'Europe

Mar 11, 2015 Daniel Gros

BRUXELLES – Dans l'économie mondialisée d'aujourd'hui aucun prix n'a plus d'importance que celui du pétrole brut. Plus de 80 millions de barils sont produits et consommés chaque jour, dont la plus grande partie est vendue sur les marchés internationaux. Aussi la chute brutale du prix du pétrole brut (de 110 dollars le baril l'année dernière à environ 60 dollars aujourd'hui) permet-elle aux pays importateurs d'économiser des centaines de milliards de dollars. Pour l'UE et les USA, cela représente 2 à 3% de leur PIB.

Pour l'Europe, les avantages liés à cette baisse pourraient augmenter avec le temps, car les contrats à long terme de fourniture de gaz sont indexés sur le prix du pétrole. C'est un autre avantage pour le continent, car le prix du gaz naturel y était encore récemment beaucoup plus élevé qu'aux USA qui bénéficient du coût très bas du gaz de schiste.

Pourtant beaucoup d'observateurs estiment qu'un pétrole bon marché n'est pas sans inconvénient, car cela accroît les tendances déflationnistes dans les pays avancés déjà embourbés dans le piège d'une croissance faible. Selon ce point de vue, la chute du prix du pétrole va empêcher les banques centrales de ces pays d'atteindre le taux d'inflation de 2% que la plupart se sont fixées dans le cadre de leur mandat de maintien de la stabilité des prix.

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0 Comments on this paragraph, 21 Comments on this article

george sos Mar 22, 2015

Call me preoccupied but theoretical analysis coming from an ex (or present ) employee of the IMF to me sounds always like a joke...
these are the same guys who did not manage to see the mistake in the spread sheet ,before destroying economies and societies in Southern europe.
I am sorry but to work or have work for them ,characterises a big series of political principles one would follow to be one....:):)
To the last sentence and conclusion ,"The eurozone periphery, in particular, can look forward to an ideal combination of low interest rates, a favorable euro exchange rate, and a boost in real incomes as a result of cheap oil.@
i have to say that this is naive thinking and analysis...Ignores that the most is to be won by not the periphery but from Germany...and no ,this is not an analysis,rather a comment on other peoples analyseses....:)seseses...(just plain common sense basically would answer most of these argumants ,like the one that greece is to gain from that!..
A small additional point.Heat for the southern counties is not such a big expense as you d be made to think reading the article...
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Ben Leet Mar 21, 2015

Higher wages is not a given. Since 1964, 51 years ago, non-supervisory workers' average weekly, and annual, wage income has increased by 2%, while the economy per person has increased by 155%. Wages are not moved by higher profits. William Lazonick has written that 94% of profits in U.S. 2001 to 2010 went to dividends and stock buybacks. Lower gas prices will increase purchasing power, but this will not increase worker income.
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Ahmed Salim Nuhu Mar 19, 2015

Whilst the writer may have made an interesting commentary on the economic benefits to households and to some extent oil-dependent firms, the implied assumption that the fall in oil prices is fundamental to fueling the deflation in the Eurozone is somewhat misleading. Again, the impact on oil producing/trading firms in the peripheral economies of Europe could be damning in the short-to-medium term.
Labour retrenchment, cuts in employee benefits, loss of tax revenues to governments on imported oil etc.
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Jose araujo Mar 17, 2015

Daniel Gros, allways a candidate for the (ig) Nobel prize in economics...

Inflation/deflation relates to the general increase/decrease in the level of prices. The key word here is general, not particular like oil prices.

How can a guy that does not understand the basics of economics have such a long CV...
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Alex Imas Mar 16, 2015

This article is both curious and largely irrelevant. Are changes in the price level caused by supply shocks different from changes in the price level caused by monetary policy? Undoubtedly. Which is why good central banks (like the Fed) look at core PCE rather than headline inflation numbers when setting monetary policy. But Europe doesn't exactly have plunging core prices, and they definitely don't have spiraling prices. So this emphasis on a positive supply shock is... pretty odd.
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larry ripley Mar 16, 2015

For consumers, the fall in oil prices will be good and from their perspective additional consumption will replace the higher price to an extent. All economies should use the price reprieve to make a run for renewable energy supplies.
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Mila Kasalica Mar 16, 2015

It is easy to write about deflation i EU periphery while not living or generating income there, than this short and bias analysis would be fully reorganized in order to include import of food, than high unemployment and less make cases for temporary decline of oil prices.
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Massimo De Angeli Mar 15, 2015

deflation is not mainly due to unemployment? For me this analysis mirrors just partially the truth. First time ever heard deflation is something good.. o.O
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Hugo Pezzoni Mar 15, 2015

Fully agree with Daniel Gros. I would only add that the sharp drop in oil prices is to some extent, a "one time" event in the sense that it should not be expected that oil prices decline by 50% every six months. The ECB may probably consider (if they are not already doing so) core inflation when measuring who far away from its target inflation rate, as the US Federal Reserve does.
- KC LOH Mar 15, 2015
  
  Agree with Hugo Pezzoni's points.
  By leaving out the unexpected sharp drop in oil prices we would have a better measure of the core inflation. And most countries probably already do that. Presumably the core inflation of most countries, stripped of effect of low oil prices, today still would be rather low or negative and requires some fiscal or monetary measures to stimulate demand and investment.
  
  Unlike a negative core inflation, which requires demand side stimulus, the deflationary effect of an oil price cut operates on the supply side. The savings from lower oil prices would enable consumers to consume more and businesses to invest more. And their increased expenditures in turn increase the income of businesses, which would then hire more workers.
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Gary Stegen Mar 14, 2015

The post is pretty much right on. In the past I have wondered why the central banks have price inflation targets rather than wage inflation targets. I think the reason is mainly public relations and politics. It is clear that the Fed also takes wage inflation into consideration in setting policy. However, if they had a wage inflation target (say 2.5 or 3%/year) what happens when they hit the target? They could come out and say directly or indirectly "we have to raise interest rates because workers are getting paid too much."
I think the benefits to the US are real but a lot less than most European countries because of the slowdown in the oil boom in the US. There is a lot of reduction in investment, employment, state and local taxes, royalties, and other spin off effects that partly offset the reduction in consumer prices for oil.
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KC LOH Mar 13, 2015

Perhaps we should view the current unexpected oil price drop as a replay of the supply side boom of the Reagan years. Or maybe an inverse of the supply side oil price shock of the Nixon years. Or perhaps a combination of the two, because one is a mirror image of the other, isn’t it?
To recap, in the early 1970s a sudden unexpected sharp oil price hike brought the US’s economic boom of the 1960s to an end. And a new economic phenomenon, stagflation was born: an economic condition of both inflation and recession. The Aggregate Supply curve shifted to a lower level of output potential (i.e. to the left in the AD-AS model) in what became known as cost-push inflation.
A decade later, the Reagan years saw a kind of the inverse of the supply side cost-push stagflation. His supply side tax cuts shifted the Aggregate Supply curve to a higher level (i.e.to the right) and the US economy took off without inflation, as Reagan had promised. (Well, yes there were the deficits. But that’s another story).
Fast forward to 2014. Oil price was around $100 per barrel in July 2014. By Dec 2014, oil price had fallen below $60.
So, leaving aside other factors that affect growth, the oil price windfall should do the economy some good, shouldn't it?
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Manuel G Samuel Mar 13, 2015

Some harsh and dislocated comments here and I see none debunking the fact that low energy prices are indeed good for oil dependent countries. Stating that the falling Euro will offset gains from cheaper oil is fully inaccurate due to the differentials (oil prices have fallen by a much steeper percentage than the Euro regarding the US dollar). It is clear and evident that aggregate supply side prices will fall as a consequence of cheaper oil. It is a windfall that oil dependent countries should use to invest in renewable energies. Together with a cheaper Euro, QE, speeding market and labor reforms across the EU (those who deny that they're happening simply don't know what's going on); banking union, Junker's spending plan and increasing investment in high tech industries, all together we have a powerful mix for economic recovery. And stop nagging about deflation being a nightmare. That's more than ever an obsolete myth. To the QE naysayers, how do you want to boost production without public or private investment? And how do you want to invest without money? Daniel Gross is utterly right. Well done Daniel.
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Stamatis Kavvadias Mar 13, 2015

Utterly nonsense. Another expert in ...mathematics for economists. It is not even worth the effort to demolish this series of non-arguments and logical gaps...
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Ernest Dautovic Mar 12, 2015

As usual Gross demonstrates his ignorance of the facts. He does not understand that appreciation of the dollar vis-a-vis the Euro crowds out any gain from lower oil prices, which are btw incrementing again. His opinion eds are simply biased and wrong. P.S. I am sure that one day that Europe restores growth he will claim that he was right. Such a farce.
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Vanishing Leprechaun Mar 12, 2015

The slump in the oil price will only be reflected in a very very small fraction on consumer prices, because we don't need only to buy oil, we need to transport it, to stock it, to refine it, to stock the output, to transport it, to sell it to customers. And to pay taxes on all this process stages. And this process keeps the huge majority of the final fuel prices. In any case, this will not affect core inflation.
So, this slump will rise the consumers available income only at a negligible level. And what it is happening, Mr. economist, in present times is that every modest increase in household income will be transferred in savings, not in consumption. And this attitude is multiplied by deflation.
We don't have a liquidity problem!
Deflation is a symptom, not a sickness. It's the symptom of recession, long-term stagnation, i.e. of stagnating demand. This is the reason for what it is a very very bad thing. As a side-effect, not only debts, by also not invested capital aren't devalued.
It is correct to say that the debt problem is income, not debt amount itself, but debt devaluation by inflation can help, where debt (and capital) real burden growth by deflation it isn't in any way a good news, Mr. Gros. Moreover, deflation will bring to stagnating incomes.
As to the ECB QE, please wait some month Mr. Gros, and you will verify how it is mainly rhetoric.
We don't have a liquidity problem!
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Procyon Mukherjee Mar 12, 2015

The BIS paper in February: "Oil and Debt" clearly articulates the conundrum with cheap oil, the price of oil could move sideways for a very long time as debt servicing capacity shifts to low gear and concurrently liquidity concerns would disallow cash flows to be reduced by plotting any form of supply cuts. The swap dealers in the futures market who were protecting the turf of hedges for the producers are now reeling under liquidity pressures and this makes the scene scary with rising volatility.

The total debt of Oil & gas industry stands at $2.3 Trillion, whereas the revenues tanked from $5 Trillion to $3 Trillion, this would be enough to wipe out $1 Trillion in profitability in this sector. It cannot be great news for any economy with some footage in it.
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Fabio Pieiller Mar 11, 2015

When deflation interests any corner of our life we can't limit our reasonments to crude oil. Deflation in Europe has begun before oil price falling, and it's nevere been good news. This is a humble thought from an Italian craftsman, which is living deflation on his skin.
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Teddy Wong Mar 11, 2015

The important distinction to make is whether inflation (or deflation) is coming from the aggregate supply side of the equation or aggregate demand side of the equation.

From the aggregate supply side, deflation is good, and central banks do not need to respond as strongly (or at all) to falling prices as if the price level is falling due to lower aggregate demand. Falling prices due to aggregate supply factors make debt payments easier to make.

The problem for Europe is that falling aggregate demand is also a factor and that's what the central bank has to counter. Deflation due to less aggregate demand makes debt payments more difficult to service and the unconventional monetary policy (QE) is necessary to bring output back to potential, reduce unemployment, rectify balance sheets, and service debts.
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John Brian Shannon Mar 11, 2015

Hi Daniel,

As a general statement, it could be said that low energy prices improve an economy while higher energy prices retard growth.

Yet, each economy adapts to 'the new normal' and any departure from that benchmark can be seen as a positive (lower energy costs) or a negative (higher energy costs)

Other non-energy parts of the economy advance or retard over time, due to energy pricing.

Therefore, all economies benefit from lower energy costs -- but those economies which are severely underperforming experience the largest improvement.

Low energy costs may help healthy economies, but orders of magnitude larger is the help that low energy prices give to underperforming economies.

It's my prediction that oil prices will continue to track at less than $60./bbl generally, until June/July 2016, whereupon oil prices will rise to $75./bbl and will only fluctuate ten dollars either side of that new norm until 2020, possibly 2025.

Which should give the weaker eurozone nations plenty of time to pull up their socks, the stronger eurozone members plenty of time to capitalize on the new norm, and the strongest economies like the U.S. and China to continue their growth.

Apart from repair and growth, the smartest economies will use this low oil cost window of opportunity to invest heavily in renewable energy, to lower energy costs over the long term.

New solar benchmark at 5.84 cents per kWh.

“The UAE and others, through the auction mechanism, have begun to show a different tier for the future, which is rapid increase of renewable energy based on cost and feasiblity.” -- The National (UAE)

"This means that the solar power generated from this phase will be sold to Dewa at a fixed rate of 5.84 cents over 25 years. The price of natural gas – which generates 99 per cent of the UAE’s electricity – stands at 9 cents. Solar energy is not only cost-competitive with conventional forms of power generation, but in the UAE it is even cheaper." -- The National (UAE)

http://www.thenational.ae/business/energy/uae-beats-renewables-cost-hurdle-with-worlds-cheapest-price-for-solar-energy#full

New wind installations benchmark at 2.5 cents per kWh.

"...the most recent DOE analysis finds that wind power is at 2.5 cents per kilowatt-hour, an "all-time low." One of the authors of the report, Berkeley Lab Staff Scientist Ryan Wiser, wrote, “This is especially notable because, enabled by technology advancements, wind projects have increasingly been built in lower-wind-speed areas.” -- Green Tech Media

http://www.greentechmedia.com/articles/read/Price-of-US-Wind-Power-at-All-Time-Low-of-2.5-Cents-Per-Kilowatt-Hour

And costs of solar panels and wind turbines have plummeted by 80% over the past 2 years.

Therefore, now is the time to plan ahead for cheaper renewable energy as the global economy continues to uptick courtesy of low oil prices.

Stated another way, renewable energy prices continue to fall and almost don't need subsidies anymore -- while fossil fuels will only rise, even as they receive (globally) more than $548 billion dollars in subsides annually.

"The IEA’s latest estimates indicate that fossil-fuel consumption subsidies worldwide amounted to $548 billion in 2013, $25 billion down on the previous year, in part due to the drop in international energy prices, with subsidies to oil products representing over half of the total. Those subsidies were over four-times the value of subsidies to renewable energy and more than four times the amount invested globally in improving energy efficiency." -- IEA

http://www.worldenergyoutlook.org/resources/energysubsidies/

I appreciate the clarity of your writing, Daniel.

Best regards, JBS
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Juhani Huopainen Mar 11, 2015

The real problem with lower oil prices is that it lowers the inflation, and when central banks are targeting inflation rates, it makes reaching the target in a sustainable manner more difficult. Sure, cheap production factor prices are good for the consumers and producers in the short run.

But in the longer run, the logic is different - otherwise, deflation in general would be a good thing. I also see the rise of the corporate credit risk premiums after the oil's plunge as worrying.
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