Investors warned over eurozone oil price risk

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The oil price drop may boost eurozone consumer spending growth this year but unless it falls back, the impact is likely to be short-lived, warns Capital Economics.

The research group anticipates the fall in the cost of crude could bolster 2015’s spending tally by 1 per cent and as a result expects GDP growth across the currency bloc to hit 1.5 per cent.

But it also forecast it will fall to just 1 per cent in 2016.

The drop in oil prices, from a high of $115 per barrel of Brent Crude last June to around $61 today, has put more cash in consumers’ pockets and subsequently boosted spending.

On past form, the decline in spending on fuel so far looks quite small, notes Capital Economics assistant economist Jack Allen.

He says: “Since last June, the euro price of oil has more than halved. But spending on fuel has fallen by just 6 per cent. Nevertheless, the fall in oil prices could still have provided a fairly large boost to overall household spending.”

Looking ahead, he expects low oil prices to continue to be supportive of spending growth this year. But there is scope for spending on fuel to decline further and it still appears that lower fuel costs are yet to feed through fully into consumers’ energy bills or firms’ selling prices.

In addition, the price of oil has already risen markedly since it $45 dollar.

“Factoring in our Commodities team’s forecast for the US dollar price of Brent crude, and our forecast for the euro exchange rate, we think that the euro price of oil will remain low, rising only slightly from its current level of around €54 per barrel to €59 by the end of 2016.

“However, the boost to spending growth from low oil prices will fade in 2016.”

But reports show analysts at Goldman Sachs believe another decline in oil price is on the cards. The investment bank anticipates it could go as low as $45 per barrel by October.