Oil surge prompts ratings agencies to downgrade global growth

Rating agencies cut global growth forecasts due to crude oil surge – Photo: Shutterstock

The world’s biggest rating agencies have lowered their forecasts for global economic growth as ongoing hostilities between Russia and Ukraine push international crude oil prices to decade highs, causing inflation to spike in the largest economies.

Fitch Ratings cut its global gross domestic product (GDP) growth forecast for 2022 by 0.7 percentage points (pp) to 3.5%. It also lowered its growth forecast for the euro zone by 1.5 pp to 3% and for the United States by 0.2 pp to 3.5%. Fitch revised global growth for 2023 down 0.2pp to 2.8%.

For its part, Moody’s said it now expects the G20 economies to grow collectively by 3.6% in 2022, down from an estimated 4.3% growth in February. Growth will slow further to 3% in 2023. Russia is the only G20 economy expected to contract this year, by 7%, then contract by 3% in 2023, compared to projected growth of 2% and 1.5% respectively before the invasion of Ukraine.

“The outlook for global GDP growth has deteriorated significantly as inflation concerns escalate and Russia’s invasion of Ukraine threatens global energy supplies,” Fitch Ratings economists said.

Supply disruptions

Russia supplies around 10% of the world’s energy, including 17% of its natural gas and 12% of its oil. Soaring oil and gas prices are pushing up costs and reducing the real incomes of consumers around the world.

Rating agency economists said Russia’s invasion of Ukraine and subsequent economic sanctions against Russia put the world’s energy supply at risk of severe disruption. Moreover, sanctions against Russia may not be lifted any time soon. The potentially huge global supply shock, which will reduce economic growth and harden inflation, is hampering post-Covid-19 pandemic recovery, they said.

Russia’s action has significantly altered the global economic backdrop due to soaring commodity prices that have been driven by existing and anticipated supply shortages. This creates the risk of extremely high input costs and consumer price inflation over an extended period. Overall, the military offensive has led to an increased risk of financial and trade disruption in today’s global economy.

Analysts also suggested that the heightened security and geopolitical risks emanating from the Russian move will weigh on the economy by rattling sentiment.

“We are reducing our global economic growth projections and raising our inflation forecasts. We view global expansion as battered, but not derailed. The magnitude of the effects on growth will depend on the duration and depth of the conflict,” Moody’s said.

Inflation is rising

“Global inflation is back in full force after an absence of at least two decades. It’s starting to look like a moment of regime change in inflation,” said Brian Coulton, chief economist at Fitch Ratings.

The rating agency warned that energy shortages and rationing are possible in Europe if the supply of Russian crude oil is abruptly cut off.

Russia supplied around 25% of the euro zone’s primary energy consumption in 2019. Diversification into other sources will take time and threatens to drive up inflation, which could average 5% in the zone euros in 2022.

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Analysts said that while the military conflict will hurt economic activity and exacerbate inflation, a wide range of outcomes are possible, which would depend on the duration of the crisis and its potential escalation, as well as the policy response. and efficiency of each country.

US stocks

Fitch Ratings said its revised call reflected the slowing global economy caused by soaring energy prices and the faster-than-expected pace of interest rate hikes in the United States.

“The US Federal Reserve had already become hawkish before the invasion of Ukraine. We now expect a total of seven rate hikes in 2022 and the (top) Fed Funds rate returning to 3% by the end of 2023,” Fitch Ratings said.

The United States’ dependence on Russian energy is much lower than that of Europe, but the rise in world oil prices is adding to what was already becoming a major inflation problem, have said economists.

The prices of consumer goods in the United States are rising sharply and inflation in services has reached its highest level in 30 years, driven by wage growth.

“Inflation challenges and supply shocks could weigh much more heavily on global GDP growth if they prompt much more aggressive Fed tightening, push oil prices to $150 a barrel for a extended period and were associated with widespread energy rationing in Europe,” said Fitch Ratings. .

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