It’s a hackneyed phrase these days.
But with General Election campaigning unofficially kicking-off today, it’s worth taking at economy to understand the state of the economy.
The politicians will have you believe the only economic story that matters is getting rid of the deficit.
And yes, the deficit needs to be reduced (how you do that is a story for another time).
The economic story that matters today is the oil price.
It’s down about 50% since June 2014.
As an example of how far it’s fallen, the Scottish Government had priced in $110 per barrel when assessing the public finances for an independent Scotland. It’s now closer to $50 per barrel and will only fall further.
What does oil have to do with a General Election?
Well, lower oil prices have fed lower petrol prices at the pump. Regular unleaded has fallen 15% since July, putting more money in peoples pockets even as wages have begun to creep up.
Consumer (ie voter) sentiment on voting day could matter.
But for me the bigger story is why the oil price is falling, especially during a time of significant geopolitical stress (which tends to push prices up).
Partly there’s significant over supply from Russia (which is desperately trying to maintain revenue by pumping more oil) and form the US shale boom. And OPEC – the oil producers cartel – isn’t interested in cutting production to prop up the price.
But there’s also significant demand weakness.
China’s growth is slowing significantly – with some suggestions that real growth has slowed from almost 12% in 2010 to below 5% now (see Fathom Consulting’s China Momentum Index.
The Eurozone has shifted from a two-speed recovery to a no-speed recovery.
And even the UK’s manufacturers have started 2015 on a very downbeat note.
So while lower oil prices are cutting pump prices and energy costs for individuals and businesses, that extra cash might not translate into extra spending if people become concerned about the wider economic prospects in the coming months.
My best guess?
The oil price slide is a mix of the over supply and demand problem. Short-term, I don’t see any reason why the oil price could’t fall below $40pb. Longer-term, weak demand will keep it low (between $60-$80pb). And if demand remains weak, that will feed through to economic activity.
A key gauge on how consumers feel will be the GfK Consumer Confidence indicator out on 30th January.
We’ll check back then on how consumers are feeling and where the oil price is.
But with all the deficit talk, we’d be stupid to ignore what the oil price is telling us about the global economy.
