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Macroscope | Why crashing oil prices amid the coronavirus epidemic are good news for most of Asia
- Most Asian economies are net oil importers so a fall in oil prices will lead to stronger economic growth, allowing governments to initiate fiscal stimulus measures to counteract the effect of the coronavirus outbreak
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The world economy and financial markets, already deeply shaken by Covid-19, received another jolt this week in the form of the dramatic recent fall in oil prices.
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Despite these dual shocks and after an initial sharp hit to global economic growth that is expected to affect the first two quarters of this year, an eventual recovery in the world economy during the second half still seems likely. However, uncertainty in the economy and in financial markets has increased, as the precise interplay of these two shocks is unclear.
From an economic standpoint, in the medium run, lower oil prices are a positive for most economies in the world. They lower import bills and act like a tax cut for consumers and companies. Most Asian economies are net oil importers, with the exception of Malaysia.
Other things being equal, a decline in oil prices should lead to stronger economic growth as balances of payment improve due to falling import costs. As the world’s largest net oil importer, China is likely to enjoy our region’s biggest saving on its oil import bill. Thailand, Taiwan and South Korea are also well positioned to benefit, given they have the largest net oil deficits as a share of gross domestic product in the region.
That said, the benefit from lower oil prices may be more moderate this time given the weakened demand as a result of the Covid-19 outbreak. Transportation and travel sectors in Asia have been particularly hard hit. Lower oil prices will also dampen oil exporters’ demand, posing challenges to Asia’s export performance.
Central banks around the world are reacting swiftly to the twin shocks hitting the economy, with Chinese authorities at the vanguard of easing. Outside Asia, the US Federal Reserve, as often is the case, has been in the lead. It has cut interest rates already and is expected to cut them further soon as well as react with a host of technical measures to ensure continued financial market functioning and fight tightening credit conditions.
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