19.01 Weekly Viewpoint : The purchasing power of European and US households will not be left unaffected by the surge in the price of oil observed since mid-2017

The purchasing power of European and US households will not be left unaffected by the surge in the price of oil observed since mid-2017…….

However, as the movement is taking place against a background of optimism on the future, it is less likely to negatively impact real consumption. Furthermore, it is also fuelling a lively recovery in exports to producer countries. Monetary policy normalisation continues, and expectations for rate hikes are mounting.

– Since mid-December, several movements have been observed that may be tied to the spreading of more optimistic views on the global growth scenario: an increase in yields on the rate curves, further gains for the global stock indices, and, lastly, rising oil prices as well. Brent Crude oil hit the USD 70 mark, well above the levels forecast a year ago. This trend probably also reflects shocks on the supply side, and the trend of the currency markets (the dollar has weakened, despite the approval of the tax reform and the upward revision of expectations referred to fed funds rates). In percentage terms, the rise in oil prices since mid-2017 has been significant (+42%). However, also due to the simultaneous appreciation of the euro against the dollar, the movement of energy sector price indices has been much more modest. As a result, 2017 brought a drain of disposable income no higher than 0.2% in Germany, and only a little larger in Italy. Within these limits, and in an environment of optimistic views on the future, the rise in energy prices could possibly be offset by changes in the propensity to save, with no negative repercussions on the real consumption trend. 

However, the net impact on growth could turn out to be even less worrying should the positive fallout on foreign demand originating in producer countries be confirmed.  In 2017Q3, the overall imports of producer countries had already risen back to the same levels as at the beginning of 2016, recovering around 17 billion dollars compared to the same period in the previous year. Of these, around two billion were claimed by Germany, and just under one by Italy. China also enjoyed an increase in exports to oil producer countries, by around $2bn. This trend should continue in 2018, despite some disruption tied to the appreciation of the euro.

– The gradual normalisation of monetary policy is proceeding. This week, in the wake of robust economic fundamentals, the Bank of Canada stepped up its policy rate to 1.25%. In the United States, Kaplan (Dallas Fed) mused that four rate hikes may be required in 2018, although his message was balanced in part by the persistently cautious stance of Evans (Chicago Fed). The Beige Book prepared for the FOMC meeting at the end of the month certifies ongoing growth in activity at rates defined as between “modest and moderate” in 11 districts, and “robust” in the Dallas area, albeit without providing crucial indications. At present, the fed funds market is pricing in between two and three hikes in 2018, and upside expectations have increased further the past few days (the December contract has shed a further 6bps). We will discuss US monetary policy in greater detail next week, in our usual preview ahead of the Fed meeting.

In the ECB camp, the lo EUR/USD exchange rate’s upward thrust has generated some unease within the Governing Council, prompting several members to warn that developments should be monitored closely. As noted by Anna Grimaldi in her analysis in this edition of our Weekly Economic Monitor , recent events could induce the ECB to keep a low profile in the months ahead, and to refrain from speeding up the change in its monetary policy stance too much. Although abandonment of the zero-rate policy in 2019 seems increasingly likely, in light of the stronger than expected trend of the European economy.

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