Lower oil prices offer small comfort amid downturn - Capital Economics
China Economics

Lower oil prices offer small comfort amid downturn

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As the world’s largest oil importer, China stands to gain from the recent fall in oil prices. But the boost to growth will be modest and won’t make up for the hit to Chinese exports from weaker global demand.

  • As the world’s largest oil importer, China stands to gain from the recent fall in oil prices. But the boost to growth will be modest and won’t make up for the hit to Chinese exports from weaker global demand.
  • Oil prices have fallen 20% this week, bringing the total decline since the start of the year to around 45%. While a partial recovery seems likely later this year, Saudi Arabia’s decision to boost supply in order to defend its market share will keep prices low. We expect Brent to end 2020 at $48 per barrel (vs $36 now).
  • Despite China’s increasingly important role as a source of global oil demand, its economy has become less sensitive to swings in oil prices during the past decade or so. Its import bill for petroleum products was around 2.1% of GDP last year, down from 3.5% in 2008. (See Chart 1.) One quarter of this drop reflects a reduction in the energy intensity of GDP, while the rest is due to the decline in oil prices since 2008. This lower starting point means that the windfall to China will almost certainly be smaller this time (as a % of GDP) than during the past two oil price routs in 2008/09 and in 2014/15.
  • A smaller share of this windfall will accrue to consumers than in most developed economies. Low car ownership rates mean that vehicle fuel only makes up 2.0% of the CPI basket in China, compared to 3.7% in the US and 4.4% in the Eurozone. Utilities, including heating and electricity, makes up another 5.1% (US: 4.2%, EZ: 8.3) but most of this energy is generated from coal and renewables. We estimate that lower oil prices will shave off just 0.3%-pts from consumer price inflation this year.
  • Instead, the main beneficiaries will be firms, which consume over half of all petroleum products. (See Chart 2.) The main exception will be oil refiners, that typically see profits squeezed during periods of low prices. But these are mostly large state-owned firms that should be able to weather the hit. On average, we estimate that lower oil prices this year will boost profit growth among industrial firms by 2%-pts.
  • The degree to which the windfall from lower oil prices will boost GDP depends on how much of it is spent. We suspect that with lingering concerns about the virus weighing on discretionary spending, households will save the bulk of their gains. In contrast, firms are likely to spend most of their gains as they run down their savings in order to stay afloat. On an economy-wide basis, our assumption is that 40% of the reduction in China’s import bill for petroleum products will be saved, while the rest will be spent. Only spending on domestically-produced output will boost growth which, given the import intensity of China’s economy, is likely to be around 85% of total spending.
  • All told, the 0.6% of GDP reduction in China’s import bill that we anticipate this year from lower oil prices should raise output by 0.3% above what it would have been with higher oil prices. This will provide some relief but is a small offset to the many other drags facing the economy, including the slump in global demand that has contributed to the fall in oil prices. For example, a 2%-pt decline in export growth would fully wipe out the gains we foresee from lower oil prices. We expect a slowdown in exports this year of at least three times that magnitude.

Chart 1: Petroleum Imports (% of GDP)

Chart 2: Petroleum Consumption (% of total, 2017)

Sources: CEIC, Capital Economics

Sources: CEIC, Capital Economics

Julian Evans-Pritchard, Senior China Economist, +65 6595 1513, julian.evans-pritchard@capitaleconomics.com


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