Higher-than-expected oil prices in a scenario where the Middle East conflict disrupts oil supply would cause lower economic growth and higher inflation, Fitch Ratings says. World GDP growth would be 0.4pp lower in 2024, but only 0.1pp lower in 2025, although the absence of a significant rebound suggests there could be a persistent moderate impact beyond the initial shock.

Fitch’s September Global Economic Outlook (GEO) assumes average oil prices of USD75 a barrel (bbl) and USD70/bbl in 2024 and 2025, respectively. 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. Our scenario assumes that, due to supply restrictions, oil prices average USD120/bbl in 2024 and USD100/bbl in 2025.

As a comparison, the price surpassed USD120/bbl at today’s prices during the shock of 1979-1980. Oil prices averaged USD82/bbl (Haver Brent EIA series) in 2023 until the 7 October assault on Israel by Hamas, when prices increased to USD94/bbl before easing to USD87/bbl by early November.

Higher oil prices would dampen GDP growth in almost all the GEO’s ‘Fitch 20’ economies, although the impact would largely dissipate in 2025. The absence of a significant growth rebound in 2025 implies a longer-lasting, if generally moderate, impact on GDP levels in most countries, which could affect assessments of potential growth.

The negative growth impact in 2024 relative to our September GEO forecasts ranges from 0.1pp in Indonesia to 0.9pp in Korea. The US, the eurozone and Japan see impacts of 0.5pp.

The largest impacts among the main emerging market countries would be in South Africa and Turkiye (0.7pp). Russia, and to a much lesser extent Brazil, would see a positive impact due to the important role of oil production in these economies. Using the aggregate impact on the Fitch 20, the global GDP growth shortfall would be 0.4pp in 2024 and 0.1pp in 2025.

Higher oil prices would lead to higher-than-expected inflation rates in 2024, followed by corrections in 2025. Turkiye sees the highest percentage point rise in forecast inflation, followed by India and Poland. However, the India and Poland’s relative increases would be much larger. Among developed economies, the impact would be more muted with the US seeing inflation rates around 2pp higher than forecast by end-2024, Canada a moderate increase (0.4pp) from the baseline and other advanced economies’ inflation higher by an average 1.4pp.

The inflation impact would be short-lived and partly offset by lower-than-forecast inflation rates in 2025. Brazil and Mexico are outliers, with higher inflation in 2025.

The monetary policy response is quite muted in this scenario because a supply-side shock would increase price pressures through higher petrol prices and costs, but reduce demand from firms and households. Central banks would, all else being equal, look to increase policy rates to address higher inflation, but loosen policy in response to demand shortfalls. These effects broadly cancel each other out in the model-based scenario analysis with slightly slower interest rate cuts in 2H24 versus our baseline. However, 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.

An oil price shock related to the Middle East conflict could be accompanied by tighter financial conditions, lower business and consumer confidence, and corrections in financial markets. Modelling a more severe shock incorporating an additional 10% decline in share prices in 1H24 has larger effects, with GDP growth next year lower than the baseline by 0.5pp to 0.9pp in the US, Japan, China, the eurozone and the UK, and world GDP 0.6pp lower.

The sovereign credit impact of higher-than-expected oil prices would depend on various factors, including the consequences for public finances, external finances and financing conditions, as well as the balance of energy exporters and importers in Fitch’s sovereign portfolio.
Source: Fitch Ratings