The decline in oil and natural gas prices this year will limit the global economic downturn, particularly in Europe where fears of recession and runaway inflation have receded.
oil prices are currently trading in a narrow range around the low $80 a barrel, from above $100 and at times $120 a barrel in the spring of last year. Natural gas prices in Europe are at an 18-month low for most of this winter, thanks to energy savings, demand destruction, well-above-average inventories and milder weather. Europe’s economy has held up better in recent months than expected in the autumn, also as energy prices and consumer confidence have eased the burden on industrial production.
In the United States, the economic picture is more mixed, but consumers have felt relief at the pump in recent months, compared to record highs of over $5 a gallon for regular gasoline at the start of last year’s driving season. As the new driving season approaches, spending on gas could be much lower, leaving savings to spend on other goods and services.
But analysts say spending on other items could continue to keep inflation higher than the Fed would have liked while the real impact of rising interest rates on consumer finances and mortgage payments is yet to be fully felt. With expectations that the Fed won’t stop raising rates – and could even return to a 50 basis point hike later this month – consumers have yet to see the full impact of interest rates on their intentions for the rest of the year.
See also: Contagion Fears of Bank Collapse Spread to Oil Prices
However, falling energy prices have helped economies on both sides of the Atlantic in recent months, economists say The Wall Street Journal.
“It’s hard to overstate how important this is in terms of Europe’s macroeconomic outlook,” Neil Shearing, chief economist at Capital Economics in London, told the Journal.
Europe, which was feared to slip into recession in the final quarter of 2022, avoided a slowdown late last year. Also thanks to the lower energy prices than in spring and summer 2022 after the Russian invasion of Ukraine and the major event that followed, according to the latest interim forecasts, the euro zone will again avoid a recession this year and achieve small economic growth Change in global energy trading.
The European Commission last month revised its inflation forecasts for the EU economy slightly downwards and the economic growth outlook for 2023 upwards, saying that the EU economy should avoid a recession this year.
Germany, Europe’s largest economy, is now expected to grow by 0.2%, compared to a previous forecast of a 0.6% contraction, “a clear turnaround driven by falling energy prices, a gradual adjustment in supply chains and political support for Households and businesses will be pushed forward”. EU Economic Commissioner Paolo Gentiloni, calledcomments on the winter forecast for 2023.
“The EU economy started 2023 on a healthier footing than expected and is expected to emerge from recession,” Gentiloni noted.
However, the US cannot avoid a recession if rate hikes completely catch up with economic activity.
Global economic growth prospects for 2023 have improved significantly since December, according to Fitch Ratings in its latest Global Economic Outlook (GEO) report last week.
“But the impact of rate hikes on the real economy is yet to come and is likely to push the US economy into recession later this year,” the rating agency added.
Upgrading its global growth forecast for the coming year for the first time since Russia’s invasion of Ukraine, Fitch noted improving near-term prospects reflecting China’s reopening, “a substantial easing in Europe’s natural gas crisis and surprising near-term resilience in US consumer demand .”
But the lagged effect of Fed and ECB rate hikes will be felt later this year and into next year, Fitch warned.
“Central banks are now taking the bowl away from us very quickly. It is only a matter of time before the impact on the real economy becomes more visible,” said Brian Coulton, chief economist at Fitch Ratings.
By Tsvetana Paraskova for Oilprice.com
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