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glen hodgson

It has taken a while, but the global economy is finally showing signs of responding positively to the sharp drop in oil prices in the past 12 months. Most of the world's major economies import millions of barrels of oil each day, so it is reasonable to expect the global economy to benefit from a half-price sale for oil.

Global output growth, however, stumbled toward the end of 2014 and into the first quarter of 2015. The turbulence came from around the world: The Greek debt tragedy and the resulting uncertainty in the European Union, political instability in the Middle East and North Africa, and performance slippages in major emerging markets, notably Brazil, Russia and Argentina.

Uncertainty still dominates, leading to inevitable political and economic risks to the global outlook stemming from Europe, the Middle East and Asia. But the longer oil prices stay in the range of $50 (U.S.) to $60 a barrel, the more consumers and businesses can benefit from lower energy costs, which are boosting real incomes and freeing up household spending. A long list of the world's major economies are benefiting from the decline in world oil prices, including the United States, most of Europe, Japan, China and India. Over all, the Conference Board of Canada expects the global economy to expand by 3 per cent this year and to accelerate to 3.2 per cent in 2016.

In the U.S., for example, lower gasoline prices are saving families an average of $50 or more a month, money that can be redeployed to other purposes. Initially, Americans were saving most of this rebate. But there is evidence that U.S. consumption is now growing to the point where consumers are buying larger and less fuel-efficient vehicles– even though the gasoline price discount won't go on forever. We expect the U.S. economy to rebound from a first quarter slump and expand at around a 3-per-cent pace for the remainder of 2015. Growth in the 3-per-cent range is also anticipated in 2016.

In other oil-importing regions, Asia is expected to grow in the range of 6 per cent in 2015-16.

Many of the smaller countries in the Asia-Pacific region will benefit from weaker currencies and lower energy costs. The massive quantitative easing program implemented by the European Central Bank, combined with the weak value of the euro, will help prop up growth in the euro zone.

Of course, there are negative forces at play too, especially among oil-exporting countries such as Russia, Iran, Iraq and Venezuela. All are taking a sharp hit to their exports, energy sector earnings, currencies and fiscal positions. Saudi Arabia is also feeling the effects. The Saudi fiscal deficit in 2015 may reportedly reach $140-billion, as it maintains high levels of social, developmental and military spending despite a severe decline in government revenues. Yet unlike many other oil producers, the Saudis have massive global financial assets at their disposal to deal with short-term internal fiscal gaps. There is no sign of the Saudi government wavering in its intention to cease acting as the swing producer to stabilize global oil prices.

The oil price shock is taking a bite out of Canada's economy. The Conference Board expects overall Canadian growth to slip to 1.9 per cent in 2015, and recover modestly to 2.3 per cent in 2016. The export-driven energy sector and oil-producing provinces – notably Alberta and Newfoundland and Labrador, both of which are facing recession – are bearing most of the negative impact to jobs, incomes and provincial balance sheets. Meanwhile, the outlook in the rest of the country has mildly improved, with consumers and businesses taking advantage of cheaper gasoline and other oil-based products. The real Canadian story is the uneven impact by sector and region.

Canada is a microcosm of the global 50-per-cent-off sale on oil. Lower prices are finally starting to pay growth dividends for the global outlook, but there are many small winners and a few big losers.

Glen Hodgson is senior vice-president and chief economist of the Conference Board of Canada.