Video: Global economic overview

The recent oil price drop has benefited both US consumers and energy-intensive industries. A China 'hard-landing'-CAGR slowing to 3-4%-would be felt globally.

Interview Transcript

Who are the winners and losers from the recent 25% fall in oil prices?

Since June we've had a 25 percent drop in oil prices and it has had positive effects and negative effects on the global economy. The winners, if you can call them that, probably the biggest winners, are US consumers. They are going to get a hefty tax cut, in effect. The rule of thumb is every ten-cent drop in the price of gasoline is like a 10 billion dollar tax cut. So we had a drop of about 70 to 80 cents in the price of gasoline, so that's like a 70 or 80 billion dollar tax cut, which is a lot of money. And consumers, US consumers, will spend that. So some of the biggest winners have been US consumers but also businesses. Businesses that use a lot of energy like, the airline industry for example, will be big winners from this drop in oil prices. In terms of the losers, of course, primarily, it's the big oil producers: countries like Iran, Russia, Venezuela are going to get hurt very badly by this. But we could also see a little bit of pain among US producers because as the price drops, the margins in terms of their profitability get squeezed, so we could actually see some hurt in terms of US producers of energy. But you put that in the balance, both for the US and the global economy, the winners outweigh the losers, so the net affect on the U.S. on the global economy is going to be positive.

How vulnerable is the US economy to weak growth in Europe, Japan, China and other emerging markets?

The US vulnerability to weak growth overseas, especially Europe, Japan, China, is fairly small. We only export a little bit to each of these countries, and so certainly at current levels of growth, very weak growth in Europe, very weak growth in Japan, and slowing growth in China, I think the effect on the US will not be huge. Now, if we had a hard landing in China, let's say three percent growth, or Europe went back into a recession, then the impact on the US would be greater, but at current levels of economic activity, I would say that the external environment, what's going on in the rest of the world is a fairly small threat to the US.

How likely is a China hard landing?

The big worry about China is that it has had an explosion of debt. If you look at the ratio of debt to GDP, it has risen to about 120 percent in 2007 to about 250 percent last year, 2013. That's a huge rise. No country has ever had that kind of an increase in debt without something bad happening. The question is, what is that something bad? It probably won't be the kind of melt down that we had in the US, or that Ireland had, or Greece had, but it could be a lost decade, for example, really weak growth like Japan had in the 1990s and 2000s. I think that's more likely. So a hard landing to me is a scenario in which China grows, say, three percent, four percent, for a couple of years. And of course that would be bad news for a lot of economies, especially those that have been exporting to China, exporting raw materials to China, the commodity exporting emerging markets in particular – Africa, Latin America – they would be hurt quite a bit by this kind of a scenario.

Nariman Behravesh, Chief Economist, IHS Markit