The world’s advanced economies may have a new reason to hope for a more stable footing for growth in the coming year if some of the more pessimistic forecasts regarding oil come true.
With global benchmark Brent crude falling to around $70 per barrel for the first time since late 2021 last Tuesday, one of the key components of the energy shock that led to the worst inflation crisis in a generation has become benign enough to give policymakers the green light to cut interest rates. However, the potential drop toward $60 per barrel in 2025—forecasted by Citi Group and JPMorgan Chase—could improve the chances for the United States and its counterparts to weather the impact of high borrowing costs without a devastating recession.
Tim Drayson, head of economics at Legal & General Investment Management Ltd. in London and a former UK Treasury official, said, “The chances of achieving a soft landing will increase—this applies to both Europe and the United States. Ultimately, it would be good for the world if interest rates returned to lower levels and if central banks could return to a neutral stance.”
For monetary institutions preparing to cut interest rates this month, the recent drop in oil prices has already paved the way for monetary policy easing. Officials at the European Central Bank are set to announce a second interest rate cut on Thursday, while the U.S. Federal Reserve is widely expected to begin its own monetary policy easing cycle in less than a week.
In reality, the promise of oil reaching $60 per barrel—at least for those investors and policymakers who believe it—has the potential to lower headline inflation rates further and provide a boost to consumers’ disposable income. This is a rare bright spot in a world filled with risks, ranging from potential trade wars to concerns about how China’s deflationary spiral could impact global demand.
Ben Luckock, head of oil trading at Trafigura, said during the Asia conference in Singapore last Monday that Brent crude is likely to reach the $60 per barrel level relatively soon. Meanwhile, Gunvor Group Ltd., another major trading company, warned that oil markets will deteriorate. Weak demand is part of the equation, particularly as the U.S. economy loses momentum and China’s deflationary backdrop becomes more apparent than ever.
Alicia García Herrero, chief economist for Asia-Pacific at Natixis S.A., stated that this already signals a trend in the world’s two largest economies, as China is experiencing a structural slowdown that continues, followed by the U.S. at the same pace.
