Global Economic Outlook at Risk: Fitch Warns of Potential Oil Price Shocks

Global Economic Outlook at Risk: Fitch Warns of Potential Oil Price Shocks

Asif Iqbal | November 13, 2023 | 10:27 PM IST | Breaking News | Follow on Google News

Global Economic Outlook at Risk: Fitch Warns of Potential Oil Price Shocks

Global Economic Outlook at Risk: Fitch Warns of Potential Oil Price Shocks

Higher-than-expected oil prices, stemming from potential disruptions in the Middle East’s oil supply due to conflicts, could significantly impact global economic growth and lead to a surge in inflation, Fitch Ratings said in its latest Global Economic Outlook (GEO) report.

Simulating the Impact: Fitch’s Scenario Analysis

According to Fitch’s September GEO, a scenario with average oil prices of $75 per barrel in 2024 and $70 per barrel in 2025 could be upended if oil prices spike to $120 per barrel in 2024 and $100 per barrel in 2025 due to the supply restrictions arising from the Israel-Hamas conflict and Middle-East tensions. Using simulations from the Oxford Economics Global Economic Model, we estimated the impact of higher oil prices throughout 2024-2025 on our baseline GEO growth and inflation forecasts.

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GDP Growth at Risk: Fitch 20 Economies’ Forecast

The simulations revealed a potential 0.4 percentage point (pp) reduction in world gross domestic product (GDP) growth in 2024, with a lingering 0.1 pp lower growth in 2025. Despite the modest rebound anticipated in 2025, Fitch suggests a persistent moderate impact beyond the initial shock. Higher oil prices would dampen GDP growth in almost all the GEO’s ‘Fitch 20’ economies, although the impact would largely dissipate in 2025, according to the ratings agency.

Ripple Effects and Market Corrections: A Broader Perspective

The aggregate impact on the Fitch 20 suggests a global GDP growth shortfall of 0.4 pp in 2024 and 0.1 pp in 2025. The report also underscores the potential ripple effects of an oil price shock, including tighter financial conditions, lower business and consumer confidence, and corrections in financial markets. A more severe shock, incorporating a 10 per cent decline in share prices in 1st half of 2024 (1H24), could further exacerbate these effects, leading to a 0.5 pp to 0.9 pp lower GDP growth next year in major economies.

Inflation Surge: Implications for 2024 and 2025

Higher oil prices would also lead to elevated inflation rates in 2024, with India, Turkey, and Poland experiencing the highest percentage point rises. Developed economies would witness more muted impacts, with the US seeing inflation rates around 2 pp higher than forecast by the end of 2024. While the inflation impact is expected to be short-lived and corrected in 2025, Brazil and Mexico stand out as outliers, experiencing higher inflation rates in the latter year. “After the severe global inflation shock of the past two years, a renewed rise would significantly challenge central banks’ efforts to bring inflation back to target and could boost inflation expectations,” said Fitch.

Global Economic Outlook at Risk: Fitch Warns of Potential Oil Price Shocks

Asif Iqbal

Asif Iqbal is a seasoned news writer with a passion for delivering the latest updates to the public. Currently serving as the senior writer at VoM News, a prominent news outlet known for its comprehensive coverage of diverse topics, Asif has established himself as a reliable source of information. With a keen eye for detail and a knack for storytelling, he consistently provides readers with well-crafted articles that cover a wide range of news categories. His dedication to journalistic integrity and his commitment to staying ahead of the news curve make him an invaluable asset to Vom News, ensuring that readers are always well-informed on the issues that matter most. You can find his work and stay updated on current events by visiting vomnews.in.