Low oil prices tipped to hurt Aust GDP

An extreme close up of a drop of oil creating ripples on an isolated black background

Sydney

(Australian Associated Press)

Weaker oil prices are expected to be a double-edged sword for Australia, weakening economic growth but giving a boost to household spending.

An analysis by Commonwealth Bank economists of the slide in global oil prices to below $US50 a barrel says the falls are hurting Australia’s terms of trade.

They expect the lower value of Australia’s energy exports to shave off 0.5 per cent from the country’s gross domestic product.

However they say the negative impact will be offset by lower inflation, and lower fuel prices will help boost household spending power.

Businesses that are net energy consumers will also benefit as costs come down.

“Lower oil prices will decrease demand for other energy sources which means prices will also fall for coal and LNG,” CommBank economist Diana Mousina said in a report, estimating the net impact annually at $8.4 billion or 0.5 per cent of GDP.

Australia exports a significant amount of coal and LNG, and the expected surge in LNG exports in the next five years means energy exports will become even more important for the economy.

Global crude oil prices have slid over the past year as rising supplies and lacklustre demand have prompted a steep decline since mid-2014, when crude fetched more than $US100 a barrel.

Overnight, world crude prices extended their losses as OPEC lowered its demand growth forecast for next year. Brent North Sea crude for October, the global benchmark for crude oil, tumbled by nearly $US2 to $US46.37 a barrel.

CommBank’s commodities team is forecasting oil prices to remain weak for the next two years as supply remains high and demand stays soft.

It expects Brent prices to average $US51 a barrel in FY 2016 and $US57 a barrel in FY 2017.

The decline in oil prices would however, be overall positive for the global economy, as discretionary incomes improve.

Households in Australia, which are net consumers of energy, would see income gains of around 0.2 per cent of GDP from the drop in petrol prices from average levels in 2014, CommBank estimated.

Low fuel prices will also influence forecasts for inflation for the remainder of 2015 and leading into 2016, the report said. It expects headline inflation to remain below the Reserve Bank of Australia’s target band for the remainder of the year.

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