A new term has been coined to explain a possible result of the slide in crude oil prices.

A new year – so here’s a new piece of investment terminology to explain the phenomenon of falling price pressures and expanding gross domestic product – “transflation”.

Economists continue to figure out what will be the overall impact as well as who will be the winners and losers of a dramatic drop in crude oil prices. Having traded at over $110 per barrel in late June 2014, the price of oil plunged below $50 a barrel. (Late yesterday, it traded just above $53 per barrel.) Oil exporters such as those in the Gulf Co-operation Council region, or those in Southeast Asia such as Indonesia, are seen as being hit by the oil slump – although the impact depends on how long the slump lasts. Net importers of oil (much of Western Europe, for example, or Japan) are seen as net beneficiaries.

A host of reasons have been cited for the oil plunge: a decelerating Chinese economy; the rising output of US shale oil (“fracking”); expanding Middle East output, especially from Saudi Arabia, and even the effect of rising fuel efficiency.

“The dramatic drop in oil prices is a game changer, with respect to the macroeconomic and market scenarios in 2015 and the medium term. As a result of this low price scenario, it is crucial to note that mature countries (as a group) are no longer in recession and demand could undoubtedly be stronger, but risks to the downside are still manifold. However, the supply side emerges as the main cause for the oil prices drop, rather than weak demand. However, a ‘too low’ oil price adds to the macro picture of rising global instability,” said Dr Marie Owens Thomsen, chief economist, Crédit Agricole Private Banking.

“In this context, 2015 will witness a new and rare phenomenon in the global economy – ‘transflation’. In other words, it is a situation of deflationary expansion where inflation/prices fall and GDP expands simultaneously,” Dr Owens Thomsen said.

Dr Owens Thomsen said falling oil prices will produce higher growth and lower inflation/prices in oil importing countries but pose unique challenges for exporters. Weaker oil could also be a “great opportunity” for GCC countries (Qatar, Kuwait, UAE, etc) to reform their economies to reduce reliance on energy for future earnings.

“This ‘transflation’ scenario is expected to be rather short lived, but 2015 will be the one year during which to take advantage of the unique constellation of stronger growth, lower inflation, and low interest rates – a favourable environment for all risk-asset classes,” she said.

Winners, losers

Continuing the theme of winners and losers from the oil slump, Yves Kuhn, chief investment officer at Banque Internationale à Luxembourg, said the boost to economic activity from cheaper energy could spark faster-than-expected wage pressures in the US and speed up the path of any likely Federal Reserve rate rises. This could also hit longer-dated US government bonds, increasing volatility in that asset class.

On the other hand, energy producers will cut capital spending, while junk bonds issued by energy producers will suffer. BIL notes that almost 20 per cent of high-yield debt is issued by energy companies.

“The biggest downside risk is a further deterioration of growth outside of the US, or growth deterioration within the US. As a consequence, the Fed would be unlikely to raise rates in 2015. Unemployment would rise massively worldwide, and wealth destruction could be substantial,” Kuhn said.

As far as Europe is concerned, while weaker energy prices will be deflationary in the short term, they will be inflationary further ahead because this will increase consumers’ spending power and firms will enjoy an earnings windfall because of lower energy prices.

“Europe could not hope for anything better. The weakening euro and the drop in energy prices should jump-start the European economies and with full-blown quantitative easing now in place, we may see economic growth which could be north of 1.5 per cent for 2015,” Kuhn said.