One official in India’s Ministry of Finance described the lower oil price as a ‘manna from heaven’ as the four large macro indicators – GDP growth, fiscal deficit, current account deficit and inflation – were improving significantly. A move to an average price of $60 per barrel will likely boost India’s GDP growth by 20 basis points and perhaps, more importantly, reduce the current account deficit and fiscal deficit by 70 basis points and 40 basis points, respectively. Inflation, meanwhile, continues on its steady downward trend, having collapsed from being more than 8 per cent in May last year to under 5 per cent this year.
Japan is the world’s second largest oil importer on a per-capita basis. Due to this, the oil price fall will offset some of the impact of 2014’s sales tax hike, while greatly mitigating the negative side effect of quantitative easing (QE), which has been to boost imported energy costs. Oil deflation should lower the bar for more QE from the Bank of Japan. It is likely the central bank will bring forward the next increase in asset purchases.
In addition, the lower cost of energy should enable Japan’s global multinationals to increase the prices they pay to their domestic suppliers. This raises profits, wages and capital expenditure and is key to the domestic Japanese economic recovery. This medium-term support for the Japanese market is significant. Once markets realise this, Japanese companies will be rewarded with higher ratings.
James Dowey is chief economist at Neptune Investment Management
