$60 oil price, hope for a "soft landing" in the global economy?

If the most pessimistic predictions about oil prices from Wall Street and some commodity giants come true in the near future, it may be good news for major monetary authorities such as the Federal Reserve and the European Central Bank. This would reduce the obstacles for policymakers to cut interest rates, thereby increasing the likelihood of achieving a soft landing.

On Tuesday, the global benchmark Brent crude oil price fell below $70 per barrel for the first time since the end of 2021. The inflation impact brought by soaring energy costs has receded enough to give policymakers the green light for interest rate cuts. Since the pandemic, the energy crisis has been an important driving factor in this round of inflation.

Institutions such as Citigroup and J.P. Morgan predict that by 2025, oil prices will fall to $60 per barrel; Goldman Sachs and HSBC are also bearish on oil prices, and one of the world's largest commodity traders, Trafigura, expressed agreement on Monday; this prediction may further increase the possibility of the United States and other countries achieving a soft landing.

Tim Drayson, Chief Economist at London Legal & General Investment Management (LGIM) and former UK Treasury official, said, "The likelihood of achieving a soft landing will increase - this applies to both Europe and the United States. Overall, this is a net positive for global interest rate declines and will help major central banks return to neutrality."

Supply Strong, Demand Weak, Oil Price Decline Benefits Inflation Decline

After adjusting for inflation factors, current oil prices are at levels from 20 years ago. Analysts from J.P. Morgan and Citigroup expect oil prices to further decline next year, as weak demand growth will be offset by a large amount of new supply. Ben Luckock, Global Head of Oil at Trafigura, said at an Asia-Pacific oil conference in Singapore on Monday that Brent crude oil "may soon enter $60". Another major trader, Gunvor Group, warned that the oil market will "deteriorate".

Weak demand is one of the reasons, especially as the US economy loses momentum and deflation in Asia becomes increasingly apparent. Alicia Garcia-Herrero, Chief Economist for Asia-Pacific at French Foreign Trade Bank, said that the economic slowdown in major global economies may not be structural but cyclical.

Despite signs of weakness in the US economy, its oil industry remains very healthy. The International Energy Agency (IEA) said that in the next two years, driven by US shale fields, global oil production will increase by 1.5 million barrels per day, exceeding global demand growth by about 50%. Despite Saudi Arabia and its OPEC+ allies extending production cuts, this surge in supply is one of the reasons for the continued decline in oil prices.

**If oil prices quickly fall to $60 per barrel - equivalent to a drop of about $20 since July last year - it will have a significant impact, with lasting importance for global consumer prices. Bloomberg's SHOK model shows that such a rapid drop of this magnitude will reduce inflation rates in the US and Europe by 0.4 percentage points by the end of 2024 and the beginning of 2025.

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Drayson from Legal & General Investment Management (LGIM) said that households will notice this difference. He said: "For consumers in developed markets, this will be beneficial - it will help curb inflation and increase real income."

However, compared to the impact on consumer prices, its direct stimulating effect on economic growth may be more moderate. In the case of $60, the SHOK model predicts that the growth prospects of the United States will not change, while the economic growth of the UK and the Eurozone will increase by 0.2 percentage points.

Hetal Mehta, Director of Economic Research at St. James's Place and former UK government economist, said: "You will see the short-term impact on overall inflation - this will quickly become apparent. If inflation is low, the impact on economic growth should be moderate."

Meanwhile, US Treasury Secretary Yellen announced on Saturday that the situation in the United States is "what most people call a soft landing." However, concerns about economic deterioration - and the reduction of inflation risks - have prompted Federal Reserve policymakers to shift towards loose policies in the decision on September 18.

Freya Beamish, Chief Economist at TS Lombard, has foreseen a "soft landing" for the US economy, believing that the lower US crude oil prices are, the greater the stimulus to the economy, which is reassuring. She said in an interview: "This will return purchasing power to US consumers, helping to alleviate some of the cracks in the US economy."

Decline in Inflation Reduces Major Central Banks' Obstacles to Rate Cuts

For central banks preparing to cut interest rates this month, the recent drop in oil prices has opened the door wider for loose policies. European Central Bank officials are expected to announce a second rate cut on Thursday, while it is widely expected that the Federal Reserve will start a loose cycle in less than a week.

The first major central bank to face the changing oil price backdrop will be the European Central Bank. Officials are most concerned about the dangers brought by service sector inflation, with the current inflation rate still more than twice the 2% target, but risks to economic growth are gradually coming into view.

The drop in oil prices will impact the quarterly forecasts that the European Central Bank uses to guide expectations. In the last quarterly forecast announced in June, officials assumed an oil price of $78 per barrel in 2025, indicating that if oil prices reach $60, it would indeed have a significant downward impact on their inflation outlook.

The commitment to $60 oil prices - at least for investors and policymakers who believe in it - could further lower overall inflation rates, boost consumers' disposable income. In a world full of various risks, this is a rare bright spot, with risks including potential trade wars, conflicts in the Middle East, and concerns about global economic weakness. Senior Analyst Christof Ruehl of the Center on Global Energy Policy at Columbia University stated: "This is very helpful, especially for central banks. It alleviates inflationary pressures, which is exactly what central banks need right now."