Oil prices of around $50 per barrel could boost UK GDP by 1% and employment with 91,000 by 2020, research by PwC shows. In its research, the consulting firm also looked into two additional scenarios, with oil prices of around $73 and $108, scenarios that show less profitable results for the economy. The firm also warns in its report that the low inflation rate, which resulted from the low oil prices, is expected to rise again, something businesses and households should prepare for.
In the latest edition of its ‘UK Economic Outlook’ report*, which researches the UK economy and its recovery, professional services firm PwC specifically looked at impact of lower oil prices on the UK economy. This resulted in the conclusion that although sectors directly involved in oil and gas production will experience negative effects of the sharp decline in oil prices, the impact will generally be beneficial for the UK economy.
In the report, PwC lays down three scenarios: a scenario in which the oil price per barrel will settle at around $50 by 2020, one in which the price will rise to around $73, and one where the price will rise back to its mid-2014 level of around $108. For each scenario, the firm estimated the increase in total UK employment for 2016 and 2020.
This analysis highlights that lower oil prices are expected to boost the UK employment, with the highest rise expected in the scenario with oil prices of $50 per barrel. This will, according to the report, lead to an increase of 1% of the UK GDP, and boost in employment of 91,000 by 2020. According to the consulting firm, this will be the result of lower cost of production which will lead to an increase in overall economic activity, which in its turn will boost both investment and employment.
“Lower oil prices should have a positive impact for most sectors of the economy, households and the government, but the scale of these benefits remain highly uncertain depending on how oil prices evolve from here,” explains John Hawksworth, Chief Economist at PwC. “So businesses would be well advised to look at alternative scenarios.” Looking at the other two scenarios, it becomes clear that in these cases the impact will be smaller: with increases in GDP of 0.2% and 0.5% and of employment of 3,000 and 37,000.
Recovery UK economy
The UK economy has experienced a growth of 2.6% in 2014, which is the fastest rate since 2007 and strongest growth rate in the G7. PwC believes that, as a result of the recent fall in oil prices, the recovery will continue and forecasts the economy to grow with 2.5% in this year and with 2.3% in 2016. Looking at inflation, which was pushed close to zero as a result of the falling oil price, the firm expect it to rebound to 1.8% by late 2016.
Commenting on the expected rise in inflation, Hawksworth concludes: “Inflation is likely to remain close to zero on average in 2015 due to lower global energy and food prices, but could return to target by the end of 2016. As a result, we expect the MPC (Marginal Propensity to Consume) to keep interest rates on hold in the short term but then to increase them gradually from later this year or early 2016, returning to around 3.5-4% by 2020. Businesses and households should start preparing for this upward trend now.”
* The UK Economic Outlook report is produced every four months by PwC’s macroeconomics team.