The latest iteration of Deloitte Global's Latin American economic outlook series examines the opportunities and challenges for the economies of Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, and Venezuela. While the abrupt fall in the international price of oil has had a positive, yet dramatic, impact on the global economy, the decline is particularly good news for Latin America's domestic economic situation.
The world and the region: Declining international oil prices benefit the global economy
The abrupt fall in the international price of oil has had a dramatic impact on the global economy. In the past six months, the cost of West Texas Intermediate (WTI) crude oil has fallen nearly 50 percent, down to less than US$59 a barrel¹, a level not seen in more than six years. This decline is good news for the global economy in general, and for the domestic economic situation in particular.
In the United States, apart from the specific impact on the oil industry, lower prices at the gas pump and home heating fuel have boosted households’ disposable income and, as a result, the economy’s growth rate. It also has lessened inflationary pressures both directly and indirectly, given the substantial share of oil and its byproducts in multiple productive processes. Ultimately, lower oil prices may influence whether the Federal Reserve postpones its decision to raise short-term interest rates.
Lower oil costs may also help the situation in Europe. While there is still considerable resistance to unconventional monetary and fiscal measures that might help countries escape the financial crisis, and despite many European countries still facing a complicated economic situation—with low growth and high unemployment—oil’s decline may provide a minor stimulus. Basically, it would be a deflationary shock that, unlike the one that most European countries have felt in recent years (caused by declining nominal wages as an adjustment mechanism aimed at improving competitiveness), might actually help make consumption more dynamic and increase economic activity. Of course, given the magnitude of the macro imbalances in Europe, the oil shock on its own isn’t going to modify the economic dynamics of the region’s countries. But, it just might help to amplify the efforts that have been made in recent months by the European Central Bank in its pursuit of trying to spur the growth rate of Eurozone countries.
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