Economists are cutting back 2022 global GDP projections in the wake of the Russia/Ukraine war and elevated crude oil and natural gas prices. Heightened concerns on energy instability, supply chain disruptions and the potential for crippling cyber attacks – including on infrastructure – will also weigh on global economies.
On 24 February, Oxford Economics revised its 2022 global GDP forecast lower by 0.2 percentage point to 3.8%, with the eurozone taking the biggest hit of 0.5 percentage points.
“Russia’s actions clearly show that a prolonged period of instability, with possible large spillovers for Europe and potentially the world, is now more than a tail risk,” said Oxford economists Tatiana Orlova and Innes McFee in a research note.
“We will incorporate higher European gas, oil and food prices over the medium term in our baseline, as well as more financial market disruption and tougher EU and US sanctions on Russia,” they added.
US GDP growth to slow
ICIS senior economist Kevin Swift now expects US GDP growth to slow from 5.7% in 2021 to 3.5% in 2022 – down 0.2 percentage point from his prior forecast – and to a 2.4% gain in 2023.
“Risks abound with heightened uncertainty from geopolitical events and tightening Federal Reserve policy. The Russia-Ukraine situation is fostering higher oil prices, which will erode economic growth. Whether it tips the global economy into a downswing depends upon the extent to which oil prices rise,” said Swift.
However, he points out that the fundamentals of the US economy are still good, even with major headwinds from inflation, supply chain disruptions and geopolitical events.
The ICIS Leading Business Barometer rose 0.1% in February and is up 7.4% year on year. “The latest reading is consistent with expansion of the US economy into summer, but growth has clearly peaked, with slower growth ahead,” said Swift.
Crude oil surge to drive inflation
Oxford economists expect oil prices to remain above $100/bbl until the early stages of the second half, and European gas prices to remain above $30/MMBtu until the end of 2022, and only fall back slowly.
Modelling the inflationary shocks, they see energy and food prices driving Consumer Price Index (CPI) inflation in the eurozone to 4.6% in 2022 and 1.3% in 2023 – up 0.7 and 0.4 percentage point, respectively, from prior forecasts.
For the US, CPI inflation is expected to average 6.5% in 2022, up 0.6 percentage point from its prior forecast while Oxford’s global CPI inflation forecast has increased by 0.7 percentage point to 6.1%.
Meanwhile, Moody’s Investors Service modelled two scenarios for crude oil – one at $100/bbl and the other at $150/bbl – in terms of impact on global GDP. In its $100/bbl scenario, global GDP growth in Q2 is cut by 0.1 percentage point, with a negative 0.5 percentage point impact in Q3 and a 0.2 percentage point cut in Q4.
A $150/bbl oil price would shave off percentage points in global GDP growth by 0.2 in Q2, 1.0 in Q3 and 0.4 in Q4, according to Moody’s. In both scenarios, the increases in oil prices occur in Q2 and stay at those levels in Q3 before returning to the baseline.
ICIS forecast for $110 oil
For oil prices, ICIS forecasts an average Dated BFOE crude price of $110.50/bbl for March, with prices dipping to an average of $94.50/bbl in Q2, and rebounding to $100/bbl in Q3 on a strong oil demand surge and tight oil inventories globally.
“Our base case assumes a long and protracted conflict in Ukraine over the coming months, but since the current set of sanctions are not expected to pose a significant impact on Russia’s oil exports, ICIS expects the risk premium due to this conflict to fade considerably in Q2, as the focus moves away from this conflict,” said senior ICIS crude oil analyst Ajay Parmar.
However, if Russia is excluded from the SWIFT banking system or direct sanctions on Russia’s oil and energy exports are implemented, ICIS forecasts crude prices could reach a high of $135/bbl in the coming months, he noted.
No restrictions on Russia energy exports
The EU and the US appear reluctant to take this step on excluding Russia from SWIFT as it would severely disrupt energy supplies with customers unable to make payments for Russia oil and gas. The EU and US are not sanctioning Russia energy exports, and the US sanctions on Russian banks even include exemptions for energy transactions.
“The sanctions and license package has been constructed to account for the challenges high energy prices pose to average citizens and doesn’t prevent banks from processing payments for them,” said the US Treasury Department. At a time of already high inflation, there is little political will to block energy supplies and thus raise prices further for consumers.
“I know this is hard and that Americans are already hurting. I will do everything in my power to limit the pain the American people are feeling at the gas pump. This is critical to me,” said US President Biden in his speech on US sanctions on 24 February.
“Higher oil prices will boost inflation and increase the cost at the pump… If oil prices continue to climb, then $4/gal gasoline will become a reality. Our rule of thumb is that for every $10 increase in oil prices, retail gasoline prices rise by 30 cents per gallon,” said Moody’s analysts. The US will instead work with other energy consuming countries to evaluate collective oil releases from Strategic Petroleum Reserves (SPRs) to boost supply in the face of higher prices.
“The recently announced Western sanctions on Russia have primarily focused on individuals and Russian banks. These sanctions will make oil trade more difficult, but they are unlikely to severely dent Russia’s 2.3m bbl/day exports of oil to Europe in the short term,” said Parmar at ICIS.
Russia also supplies Europe with almost 50% of its naphtha imports, which are used for petrochemicals production.