© Benjamin Reitzes
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It is reasonably obvious that the Euro Area's economy is struggling to register any growth at all nowadays. As a matter of fact, that does not seem likely to change in the near-term, either. The business sector is facing very weak domestic demand on such a gloomy background. Therefore, in some countries a lack of business-friendly economic reforms is holding back activity.
Euro zone inflation rate fell to 0.3% in November, however, the price cut failed to cover the lack of demand and the consumer spending remains subdued. Some analysts see that declining oil prices could serve as a potential trigger to boost individual consumption expenditure, as lower-income households will be able to rearrange their budget by wasting less on transportation costs. However, what effect on the matter do you foresee?
There is no doubt lower oil prices will help boost spending power. However, the current inflation rate is already low, which also introduces the risk of deflation. In addition to that, it is worth taking in account the drop in energy prices that could push inflation into negative territory. Hence, the ECB's biggest fear would be inflation expectations moving lower as well. So, while the drop in energy prices should be a net benefit to consumer and overall growth, the risk of deflation is something to watch.
What consequences could follow those countries, whose economy budget relies mostly on oil sales?
First of all, the Euro Area as a whole is a net importer of energy, so it will benefit from the drop in oil prices by boosting the demand numbers. On the other hand, countries like Saudi Arabia, Iran, Russia, Venezuela, and others who rely heavily on oil revenues for fiscal spending will face very difficult choices in year 2015. In any respect, there's little doubt that growth will slow sharply in economies that are heavily reliant on oil production for growth.