$50 oil price could boost GDP by 1% and employment by 90,000 by 2020

Published at 00:01 AM on 09 March 2015

  • The sharp fall in oil prices since mid-2014 should boost output and employment in most sectors of the UK economy, but effects vary considerably in alternative oil price scenarios.
  • Lower oil prices should also benefit consumers significantly, as well as boosting government revenues and narrowing the trade deficit slightly.
  • UK GDP growth is expected to average around 2.5% in 2015, easing slightly to 2.3% in 2016.
  • Low inflation in the short term may not prevent interest rate rises from late 2015 or early 2016.

The significant fall in oil prices since mid-2014 should increase overall UK economic activity. In a scenario where the oil price settles at just $50 per barrel, this could boost the level of GDP by around 1% on average between 2015 and 2020 relative to a baseline case where oil prices remain at the mid-2014 levels of around $108 per barrel. In this case, employment also increases by around 160,000 by 2016, although the effect could then moderate to around 90,000 by 2020 (see Scenario 1 in Table 1 below), according to PwC analysis in its latest UK Economic Outlook report.

Table 1: Increase in total UK employment relative to baseline: 2016 and 2020

Oil price scenarios ($ per barrel)

                         2016

2020

Scenario 1 (settling at $50)

121,000

91,000

Scenario 2 (rising to $73 by 2020)

53,000

37,000

Scenario 3 (rising back to $108 by 2020)

11,000

3,000

Source: PwC analysis (the effects shown are relative to employment levels in a baseline case where oil prices remained at their mid-2014 level of around $108 per barrel through to 2020)

In contrast, the impacts are much smaller where the fall in the oil price since mid-2014 is wholly or partially reversed by 2020. In Scenarios 2 and 3 above, PwC analysis found that the average impact on the level of GDP is 0.2-0.5%, with employment effects in 2020 of around 3,000 to 37,000 depending on how far and fast oil prices rebound.

John Hawksworth, chief economist at PwC, said:

“Future oil prices remain highly uncertain, so businesses would be well advised to look at alternative scenarios. In our central case, where oil prices rise back gradually to $73 per barrel by 2020, we project UK GDP to be around 0.5% higher on average over the next five years and employment around 40,000 higher in 2020 than if oil prices had remained at mid-2014 levels.

“If the oil price were instead to settle at $50 per barrel, however, then the eventual boost to UK employment could be more than twice as large as this at around 90,000 in 2020.

“Real household incomes also rise as oil prices fall, which increases consumer spending. And as a result of growing economic activity, we expect that government tax revenues will rise as the tax take from corporate and personal income taxes increases by more than the loss of North Sea oil and gas revenues.

“Lower oil prices should therefore 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. And of course this does pose important challenges for the North Sea oil industry that the Chancellor should bear in mind in making Budget decisions.”

UK economy recovering at a relatively strong rate

The UK recovery has now been sustained at a slightly above trend rate for nearly two years since early 2013, growing by 2.6% in 2014 as a whole. This was the fastest UK growth rate seen since 2007 and the strongest growth rate in the G7. The report projects UK GDP growth to average around 2.5% in 2015, supported by recent oil price falls, before easing slightly to 2.3% in 2016.

Key projections

 

2015

2016

Real GDP growth

Consumer spending growth

2.5%

2.6%

2.3%

2.3%

Inflation (CPI)

0.3%

1.8%

Source: PwC main scenario projections

John Hawksworth, chief economist at PwC, said:

“The UK economy has been recovering at a relatively strong rate since early 2013, although there were signs of a slight slowdown in late 2014 due to problems in the Eurozone and other geopolitical uncertainties. Risks to growth are weighted somewhat more to the downside in the short term due to international risks, but in the medium term, there are also potential upsides if the global economic environment improves.

“The services sector will remain the main engine of UK growth for both output and employment. Manufacturing and construction growth slowed in late 2014, but should remain positive contributors to overall UK growth in 2015-16.

“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 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.”

Ends                                                                                    

Notes to editors

  1. The latest full UK Economic Outlook report is launching on Wednesday 11 March, but advance copies of the research article on the impact of oil prices on the UK economy are available on request to journalists.
  2. PwC’s analysis uses a proprietary Computable General Equilibrium (CGE) model of the UK economy that allows detailed estimates to be made of the impact of alternative oil price scenarios at both the macroeconomic and industry sector level. The model takes into account the behavioural responses of households and companies within the economy and has been used by PwC in a wide range of projects for public bodies and private companies.

 

Gill Carson
PwC | Media Relations Manager
Office: 020 7212 1391 | Mobile: 07837 285466
Email: [email protected]
PricewaterhouseCoopers LLP
twitter: @gill_carson
http://www.pwc.com/


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