Fitch warns of inflationary headwinds from Middle East-driven crude rally
Fitch Ratings has issued a cautionary warning about the potential repercussions of an escalation in the Middle East conflict, particularly if it leads to disruptions in oil supplies. The rating agency suggests that such an escalation could result in a significant spike in crude oil prices. This, in turn, would have a cascading effect on the global economy, causing a slowdown in economic growth and fostering inflation.
The anticipated impact on global GDP growth is a noteworthy 0.4 percentage points lower for the year 2024. Looking further ahead, Fitch projects a more modest decrease of 0.1 percentage point in global GDP growth for 2025. The key observation here is the absence of a substantial rebound in the following year, indicating that the consequences of such an event might have a lasting and moderately impactful effect on the global economy beyond the initial shock.
This warning underscores the intricate interplay between geopolitical events, the energy sector, and the broader global economic landscape. Events in regions critical to the energy market, such as the Middle East, can have far-reaching implications, introducing uncertainties that could affect various industries and, subsequently, the overall trajectory of global growth and inflation. Fitch’s analysis emphasizes the need for vigilance and strategic planning, recognizing that geopolitical developments can exert a sustained influence on economic dynamics.
Fitch Ratings undertook a thorough assessment of the potential consequences of increased oil prices resulting from a disturbance in the Middle East conflict. To gauge the impact, Fitch employed the Oxford Economics Global Economic Model and conducted a simulation. The hypothetical scenario considered in this simulation assumes supply restrictions and envisions oil prices averaging $120 per barrel (bbl) in 2024 and $100 in 2025.
According to Fitch’s analysis, the simulation indicates that higher oil prices would have a dampening effect on GDP growth in nearly all of the “Fitch 20” economies, a group of major economies often analyzed by the rating agency. Importantly, the impact is expected to be most pronounced in the short term, but the simulation suggests that the effects would largely dissipate by 2025.
Crucially, the absence of a substantial growth rebound in 2025 indicates that the impact of higher oil prices could have a more enduring, albeit generally moderate, influence on the GDP levels of most countries. This prolonged impact, even after the initial shock, could potentially influence assessments of potential growth in these economies.
This simulation underscores the importance of understanding the potential economic repercussions of geopolitical events, particularly those affecting the energy market. Fitch’s use of a comprehensive economic model allows for a nuanced analysis, providing insights into the potential duration and magnitude of the impact on GDP growth in major economies.
Fitch Ratings’ evaluation of the potential consequences of heightened oil prices stemming from a disruption in the Middle East conflict underscores the diverse impact on different countries. Examining key economies, the findings reveal a spectrum of effects:
In Indonesia, the impact is relatively minor, projecting a marginal 0.1 percentage point reduction in GDP growth for 2024. Conversely, Korea stands out with one of the more substantial impacts, anticipating a noteworthy 0.9 percentage point decrease in GDP growth during the same year.
For major advanced economies like the United States, Eurozone, and Japan, a moderate impact is foreseen, each facing a reduction of 0.5 percentage points in GDP growth in 2024.
Among major emerging market nations, South Africa and Turkey are expected to bear substantial impacts, each anticipating a 0.7 percentage point reduction in GDP growth.
Interestingly, Russia is projected to experience a positive impact on GDP growth, attributed to its significant role in oil production. In contrast, Brazil would see a much lesser positive impact.
These estimates underscore the nuanced and varied effects of increased oil prices, influenced by factors such as a country’s reliance on oil production and its broader economic structure. Fitch Ratings’ detailed assessments provide valuable insights into the potential economic outcomes resulting from disruptions in the oil market driven by geopolitical events.
Fitch Ratings’ assessment of the potential impact of higher oil prices on global inflation rates presents a nuanced picture with distinctive country-specific outcomes. In this scenario, certain nations are expected to experience significant percentage point increases in inflation rates in 2024. Notably, India, Turkey, and Poland are anticipated to bear the brunt of these elevated inflationary pressures, suggesting a pronounced impact on their economies.
Conversely, developed economies, including the United States, are projected to encounter more moderate impacts, with inflation rates expected to rise by approximately 2 percentage points by the end of 2024. This indicates a more tempered response to increased oil prices in these advanced economic contexts.
While Fitch Ratings acknowledges the heightened inflation impact, it underscores the expectation that this effect will be transient, with corrections anticipated by 2025. This implies that the inflationary pressures resulting from higher oil prices are likely to be a temporary phenomenon in the global economic landscape.
Interestingly, Brazil and Mexico emerge as outliers in this analysis, facing prolonged and higher inflation rates even in 2025. This suggests that certain economies may grapple with more enduring consequences of increased oil prices, emphasizing the need for a nuanced understanding of the diverse economic structures and vulnerabilities inherent in the global landscape. The projections highlight the intricate interplay between oil prices and inflation, underscoring the importance of comprehensive assessments to anticipate and manage potential economic outcomes arising from geopolitical events.
