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As Oil Prices Drop, World Looks to China, India and America to Lead Growth

The decline in energy prices will act like a tax cut for consumers and help all three nations with their respective terms of trade.


Until recently, it has been the BRIC countries (Brazil, Russia, India and China) that have been the engine for growth. However, Brazil and Russia have struggled alarmingly and have been marginalised on account of internal policy debacles.

Expecting Europe or Japan to help contribute to growth in 2015 is simply not realistic. The EU region is rapidly deflating and needs significant stimulus from the European Central Bank to get the union growing again. Japan is in recession and the combination of Bank of Japan stimulus and Shinzo Abe's reforms will take some time before its impact is truly felt.

On a purchasing-power-parity basis, the CIA bloc today accounts for 40 per cent of global output. The growth rate in gross domestic product tells an even more powerful story. This year, this troika is expected to deliver 65 per cent of the increase in PPP-adjusted global GDP.

It is Brazil, Saudi Arabia, Venezuela and Russia that have clearly lost out on account of falling crude prices. This precipitous decline has ensured a wealth transfer of about US$2 trillion from the energy producers to consumers that will significantly help the CIA and the rest of the world. It will help anchor low global inflationary expectations, which will in turn give central banks around the world greater room to pursue non-traditional policies aimed at restoring growth.

US corporations, having restructured their balance sheets over the past five years, are now in the best position to compete globally. The slack in the US economy after the recession has tempered wage growth and this will continue to skew factor returns significantly in favour of capital. The ensuing growth in the US has improved tax collections and narrowed the US budget deficit sizeably in the past 18 months.

China's contribution this year to the growth in world nominal GDP may be higher than the US' for the first time in modern history. China's foreign exchange reserves have reached US$4 trillion and represent a substantial war chest that will give the Chinese tremendous flexibility to go on an acquisition binge for interesting and cheap assets around the world, especially in emerging markets which have been adversely affected by the dollar's strength.

( South China Morning Post Edited by Topco)