New Delhi, Nov 13: Higher-than-expected oil prices in a scenario where the ongoing Middle East conflict disrupts oil supply would cause lower economic growth and higher inflation, according to Fitch Ratings. According to the rating agency, world GDP growth would be 0.4 percentage points lower in 2024, but only 0.1 percentage points lower in 2025, although the absence of a significant rebound suggests there could be a persistent moderate impact beyond the initial shock.Fitch’s September Global Economic Outlook (GEO) assumed average oil prices of USD75 a barrel (bbl) and USD70/bbl in 2024 and 2025, respectively. Using simulations from the Oxford Economics Global Economic Model, the rating agency estimated the impact of higher oil prices throughout 2024-2025.
Their scenario assumes that, due to supply restrictions, oil prices average USD 120 per barrel in 2024 and USD 100 per barrel in 2025. Oil prices averaged USD 82 per barrel in 2023 until the October 7 assault on Israel by Hamas, when prices increased to USD 94 before easing to USD 87 by early November.
Higher oil prices would dampen GDP growth in almost all the ‘Fitch 20’ economies, although the impact would largely dissipate in 2025, Fitch said earlier this week.
“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,” it added. The largest impacts among the main emerging market countries would be in South Africa and Turkiye (0.7 percentage points). Russia, and to a much lesser extent Brazil, would see a positive impact due to the important role of oil production in these economies.
“Higher oil prices would lead to higher-than-expected inflation rates in 2024, followed by corrections in 2025. Turkiye sees the highest percentage point rise in forecast inflation, followed by India and Poland,” said Fitch.
However, India and Poland’s relative increases would be much larger. To sum it up, Fitch noted an oil price shock related to the Middle East conflict could be accompanied by tighter financial conditions, lower business and consumer confidence, and corrections in financial markets.