Thursday 28 / November / 2024
New Delhi: In a stark warning, Fitch Ratings predicts that 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.
According to Fitch's Global Economic Outlook (GEO), a scenario with average oil prices of USD 75 per barrel in 2024 and USD 70 per barrel in 2025 could be upended if oil prices spike to USD 120 per barrel in 2024 and USD 100 per barrel in 2025 due to supply restrictions.
The simulations, conducted using the Oxford Economics Global Economic Model, reveal 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.
The impact of higher oil prices would be felt across the board, with the absence of significant growth rebound in 2025 indicating a potentially longer-lasting effect on GDP levels in most countries.
Notably, the negative growth impact in 2024 ranges from 0.1 pp in Indonesia to a substantial 0.9 pp in Korea, with the US, the Eurozone and Japan experiencing impacts of 0.5 pp.
Emerging market countries like South Africa and Turkey would face significant impacts of 0.7 pp, while Russia and Brazil, owing to their reliance on oil production, would experience varied effects.
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.
Moreover, higher oil prices would 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.
The monetary policy response, although somewhat muted, could pose challenges to central banks striving to bring inflation back to target, especially after the severe global inflation shock of the past two years.
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 20204 (1H24), could further exacerbate these effects, leading to a 0.5 pp to 0.9 pp lower GDP growth next year in major economies.
Fitch highlights that the sovereign credit impact of higher-than-expected oil prices would depend on various factors, including consequences for public finances, external finances, financing conditions, and the balance of energy exporters and importers in Fitch's sovereign portfolio.
The situation underscores the intricate web of global economic interdependencies and the potential vulnerabilities arising from geopolitical tensions in oil-producing regions.
