Significant Drop In Oil And Gas Price May Have Saved The Global Economy

The drop in oil and natural gas prices this year will limit the global economic downturn, especially in Europe where fears of recession and galloping inflation have subsided. 

Oil prices are currently trading in a tight range around the low $80s per barrel, down from over $100, and at one point $120 per barrel, in the spring of last year. Natural gas prices in Europe are at an 18-month low thanks to energy savings, demand destruction, well-above-average inventories, and milder weather for most of this winter.  Europe’s economy has held up better in the past months than expected in the autumn, also due to the lower burden of energy prices on industrial production and consumer confidence. 

In the United States, the economic picture is more nuanced, but consumers have felt relief at the pump in recent months, compared to the record highs of over $5 per gallon of regular gasoline at the start of last year’s driving season. As the new driving season approaches, spending on gasoline could be much lower, leaving savings for spending on other goods and services. 

Yet, analysts say that spending on other items could continue to keep inflation higher than the Fed would have wanted, while the real impact of the rising interest rates on consumer finances and mortgage payments has yet to be fully felt. Considering the expectations that the Fed will not stop with rate hikes – and could even return to a 50-basis-point hike as soon as the end of this month – consumers are yet to see the full impact of the interest rates on their intentions to spend this year. 

However, the drop in energy prices has helped economies on both sides of the Atlantic in recent months, economists tell The Wall Street Journal

“It’s difficult to overstate how important this is in terms of the macroeconomic outlook for Europe,” Neil Shearing, chief economist at Capital Economics in London, told the Journal. 

Europe, which it was feared would dip into a recession in the last quarter of 2022, managed to avoid contraction at the end of last year. The most recent interim forecasts suggest that the Eurozone will avoid recession this year too, and manage to eke out small economic growth, also thanks to the lower energy prices than in the spring and summer of 2022 following the Russian invasion of Ukraine and the subsequent major change in global energy trade. 

The European Commission last month revised down slightly its inflation forecasts for the EU economy and revised up the economic growth outlook for 2023, saying that the EU economy is set to avoid recession this year.

Germany, Europe’s biggest economy, is now expected to see 0.2% growth, compared to an earlier forecast of a 0.6% contraction, “a significant turnaround driven by abating energy prices, gradual adjustment of supply chains and policy support to households and firms,” European Commissioner for Economy, Paolo Gentiloni, said, commenting on the Winter 2023 Economic Forecast. 

“The EU economy entered 2023 on a healthier footing than expected, and looks set to escape recession,” Gentiloni noted. 

The U.S., however, may not avoid recession when the interest rate hikes fully catch up with economic activity.

Globally, economic growth prospects for 2023 have improved significantly since December, Fitch Ratings said in its latest Global Economic Outlook (GEO) report last week. 

“But the impacts of rate hikes on the real economy still lie ahead and are likely to push the US economy into recession later this year,” the rating agency added. 

In the first upgrade to its year-ahead global growth forecast since the Russian invasion of Ukraine, Fitch noted the improvement in the near-term outlook reflecting China’s reopening, “a material easing of the European natural gas crisis, and surprising near-term resilience in US consumer demand.”

But the lagged effect of the Fed and ECB interest rate hikes will be felt later this year and next year, Fitch warned.  

“Central banks are now taking away the punchbowl quite quickly. It is only a matter of time before the impact on the real economy becomes much more visible,” said Brian Coulton, Chief Economist at Fitch Ratings.