After having predicted a ‘warm’ winter, we now expect markets to perk up with the return of spring as participants begin to realise that it is only a question of time before the upside from lower oil prices becomes visible in improved growth rates.
The fall in stock markets in February resulted, in my view, from excessive risk-taking by investors who, having fled rock-bottom bond yields in favour of risky assets, were caught short by the economic slowdown.
The collapse of commodity prices, reflecitng the economic slowdown, has triggered a drop in investments and renewed deflationary fears, particularly in the eurozone. Financial markets have once again focused excessively on the short-term outlook since the fall in commodity prices is of course good news for industrialised countries generally. Companies should see their margins and profits increase, ultimately favouring new investments and thereby employment.
At the same time, the purchasing power of households is improving, which should support consumption and investment projects. The fly in the ointment is that it will likely take a while before these beneficial effects become apparent, while the crisis in the energy sector still rages on.
Many US households apparently did not believe that the fall in petrol prices would last, so initially they focused on deleveraging as he main use of the cash that lower fuel prices put in their pocket. Recent statistics, however, suggest to me that they have changed their behaviour, with sales of SUV vehicles soaring.
The drop in commodity prices should therefore sustain growth, contrary to the market’s fears and the analysis of many economists. To see the upside from lower oil prices, the watchword now is patience.
Written on 7 March 2016 in Paris