Crude oil to average at $120/bbl in 2024; World GDP growth downgraded on Middle East tensions: Fitch
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.
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. Our scenario assumes that, due to supply restrictions, oil prices average $120/bbl in 2024 and $100/bbl in 2025,” said the global ratings agency.
How will oil price shocks impact GDP growth forecasts?
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. 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.
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 such as 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. 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.
How will high oil prices impact inflation levels?
Higher oil prices would also lead to elevated inflation rates in 2024, with India, Turkey, and Poland experiencing the highest percentage point rises. However, the India and Poland’s relative increases would be much larger.
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.