Lowflation is not over

In the short run, there remain upside risks on global private consumption. In our view, oil could well drop again to USD45/bbl on oversupply in the next few months. This also means that positive windfall gains for global consumers are set to last for longer than most may expect (Brent oil futures are at USD69/bbl by the end of 2016 and the fall in oil companies’ valuations has been much milder than what current oil prices might have suggested).

In particular, we find that lower-income EM countries are likely to present bright spots this year on the consumer front. Indeed, poorer households benefit the most from the fall in all commodity prices, not only oil but also food prices. In particular, India’s economic growth is expected to accelerate (to 7.3% in 2015) on the back of stronger- than-expected consumption. Recent policy reforms and a significant pickup in investment also explain such an increase in growth.

In some other lower-income EM countries, the fall in commodity prices has been significantly cushioned by the depreciation of local currencies. The worst situation is in Russia, where the Rouble has depreciated by more than 35% against the USD since last July. As such, differentiation continues to matter when it comes to EM countries and moves in FX will continue to play a significant role in the performance of consumer spending, and EM economies more generally.

Within the Eurozone, consumption numbers are already very strong – Spaniards ramped up consumption by 2.4% last year (which went hand in hand with an ever-lower savings rate) and kept buying cars in Q1, linked in part to yet another ‘cash for clunkers’ car-buying scheme (which has been exhausted due to strong demand). In this sense, the more interesting cases for positive surprises may be France and Italy. Both still have a high savings rate, expectations remain low, especially for Italy, and pent-up demand is enormous.