Oil prices today sped through the US$90/bbl—line as a proper war risk premium is calculated onto the commodity on the back of slowly but steadily deepening European geopolitical tension. But Russia and Ukraine are not the entire story. As we have flagged for some time, there was always a real risk that the global economy was in fact a weak child still, despite all the apparent post-pandemic recovery recently. For those looking a bit behind the headline numbers, the strength of market recovery was not necessarily a symptom of a strong underlying global economy.
Given the shock to economies from COVID-shutdowns, there was always going to be a sharp swing-back in economies as whole societies re-opened. Unprecedented stimulus paid out in virtually every advanced economy was moreover going to make sure this happened. Yet, we need to remember that the global economy was on the verge of a recession in late 2019 and entered the pandemic in a not entirely fit state. Then attempts to taper quantitative easing earlier had been put on hold as leaders scrambled to avert recession. Now, talk has barely started about tapering quantitative easing again and hiking rates in the US and markets start tanking.
Meanwhile, inflation has been up on the back of supply chain disruptions and disruptions in many job markets, while growth rates seem like they are loosing steam far too quickly, given all the stimulus poured into economies.
High energy costs are always a drag on economic growth and as mentioned earlier this week, make up a very large part of the inflationary pressure in the past few months. Alas, this is not going away, with energy prices set to remain high, particularly in Europe, a few months more at least. With markets feeling the heat from both an impending QE taper, rate hikes and political uncertainty, it is not surprising if commodities look like a better (if not safer) harbour.
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