23.06 Weekly Viewpoint : Oil prices down significantly since the beginning of the year

However, the movement has only restored prices to the levels observed throughout most of 2016. Furthermore, price declines due to supply side factors are less dangerous for the global economy……

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The change in absolute terms may be unimpressive (around 11 dollars), but since the end of 2016 oil prices have decreased by 20.4%. The production control measures decided by OPEC last year, and confirmed at the meeting on 25 May, seem to be proving ineffective, whereas US output is increasing and inventory levels are sustained. Could this trend pose a risk to the economic recovery in the emerging countries more dependent on commodity exports? The picture is made more complex by the fact that the deterioration of the market situation comes at a time when interest rates on the dollar are increasing, albeit only on the short end of the curve, and are not accompanied by a significant strengthening of the dollar. However, the drop recorded over the past few months has merely restored the levels observed between April and November 2016, which may represent the normal situation, as opposed to the short-lived phase of prices above the USD 50 mark, which only lasted three months or so. Furthermore, for the time being the decline in prices is due more to excess supply than to lack of demand, which typically makes the net macroeconomic effect more benign. Without doubt, however, the retreat of oil price quotations will again hold back the inflation normalisation process, as well expectations for price growth. Furthermore, it may aid to some extent a re-composition of growth to the advantage of final domestic demand, at least in advanced countries.

According to some, Brexit would ultimately have destroyed the European Union and the euro.

For not, it has only destroyed the conservative government’s parliamentary majority in the UK. The European Union has successfully imposed its negotiation sequence and, in the meantime, is preparing to launch a common defence strategy.

Negotiations on the United Kingdom’s exit from the European Union began in a markedly unfavourable context for the British. The May government has been weakened by the outcome of the snap election, which has forced the Tories to seek a coalition agreement. Therefore, those who a year ago were predicting the risk of a domino effect in Europe, have been proven very wrong: Brexit has caused an upheaval of the British political panorama, not of the continental one. The British government’s approach to negotiations still seems uncertain, possibly because the results it can reasonably hope to achieve risk proving very disappointing for Brexit supporters.

The May government also faces the tangible risk of some negative effects (such as the relocation of European agencies and of segments of financial activity, as well as the rise in inflation determined by the depreciation of the pound) materialising clearly before any of the hypothetical benefits, and well before conclusion of the negotiations. The European Union, despite the difficulties it is encountering in relations with some states of Central-Eastern Europe, has a rather clear negotiation platform; also, the fact that the agreements need to be ratified by all 27 member states and, the greater relative weight of the single market, result in a significant imbalance in the negotiation powers of the two sides.

Another interesting, though indirect, consequence of the UK referendum emerged this week, with the launching by the European Council of a structural cooperation project in the field of military defence, which will be defined in the next three months. Participation will be open to all the member states available, and the mechanism will not require a unanimous vote at the Council level to be initiated. Therefore, some aspects of the agenda laid out by the European Union authorities following the Brexit referendum are starting to take shape. On the other hand, it will still take time to understand whether progress can also be made in strengthening the monetary union.

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