However, the oil price fulfils this function only at first glance. It is certainly true that the buoyant upswing in the emerging markets over more than ten years stoked the demand for oil and contributed to the commodity price boom. With emerging-market growth now more subdued, demand for energy is expanding only moderately and weighing on the oil price. But it is also undisputed that, helped by modern production methods, the supply of oil has expanded sharply, leading to an oversupply. On top of this, the interests of the oil-exporting countries currently differ widely and OPEC has not responded to the slide in prices by cutting back production quotas. To this extent, the situation resembles the oil price collapse seen in the mid-1980s when discord within OPEC and an increase in Saudi Arabian output saw the oil price tumble by one-third. Back then the low oil price prevailed for several years, granting industrial countries hefty real income gains.
Even if today’s global economic situation is not fully comparable with back then, the impression arises that the financial markets are currently peering too gloomily into the future. All told, despite the structural problems in a number of emerging markets, the backdrop for the world economy is by no means bad: budgetary and external imbalances in many countries are substantially lower than a few years ago, financing conditions are broadly favorable and low energy prices are bolstering consumer purchasing power. However, considerable risks currently hang over the economic outlook. The relatively high forecast uncertainty stems from a host of potential shocks which could emanate from the current political flashpoints and the feared instabilities in the international financial system.
Against this backdrop it seems appropriate to take another look at the forecasts we published at the end of last year. A number of parameters have changed. Significant adjustments to inflation and interest-rate forecasts are called for given even lower commodity prices and looser monetary policy. We currently see little need to alter our forecasts for economic activity.