The already month-long Russian war in Ukraine has upended analyst outlooks of the global economy this year. Forecasts quickly shifted from a robust post-COVID rebound to rising chances of a full-blown global recession due to spiking energy prices, broken supply chains, and tight global oil supplies.
Economists, analysts, and famed investors say the odds of a recession have been rising, considering the runaway inflation, which the Fed and other central banks have already started to try to curb with interest rate hikes.
Despite the fact that recession is not the base-case scenario of most economists, the odds of a downturn are growing, they say, especially if more Russian energy exports come off the market in the coming weeks and months.
The European Union and its largest economy, Germany, have been reluctant so far to ban imports of Russian energy or impose sanctions on Russian oil and gas exports, considering that Europe depends on Russia for more than one-fourth of its oil supply and one-third of its natural gas supply.
The sanctions are working, and Germany will end its dependence on Russian oil and gas as quickly as it is practically possible, German Chancellor Olaf Scholz said in the German Parliament on Wednesday. Still, an overnight unplugging from Russian energy would mean a deep recession across all of Europe, putting entire industries in jeopardy, and allowing hundreds of thousands of job losses, he added.
The foreign ministers of the EU member states failed to come to an agreement about whether to punish Putin with an oil embargo earlier this week.
In the worst-case scenario of the Russian war in Ukraine with severe, escalating disruption with moderate policy response, and in a situation in which oil and gas exports from Russia to Europe are shut down, Brent prices would jump to $150 per barrel, analysts at McKinsey & Company said last week. In this worst-case scenario, shaken confidence and continued high prices for oil would reduce spending by consumers and businesses in the United States, and a recession would ensue, McKinsey noted.
“In the United States, the key issue will be how the Federal Reserve Board reacts to the impact of the spike in oil prices and to the jump in agricultural, mining, and mineral commodity prices (US natural-gas prices are largely independent of Europe),” the consultancy’s analysts wrote.
Should a large part of Russia’s energy exports remain off the market throughout this year, a global economic downturn seems unavoidable, Lutz Kilian and Michael D. Plante, economists from the Research Department at the Federal Reserve Bank of Dallas, wrote in an analysis this week. The analysis also warned that this slowdown could be more protracted than the 1991 recession following the oil supply shock from Iraq’s invasion of Kuwait in 1990.
“Every recession in the past 50 years has been preceded by an oil price spike, and it is déjà vu all over again,” Chris Lafakis, Director at Moody’s Analytics, wrote in a report last week.
This week, billionaire investor Carl Icahn also warned that there could be a recession amid the surging inflation.
“I think there very well could be a recession or even worse,” Icahn told CNBC on Tuesday. “I am negative as you can hear. Short term I don’t even predict,” he said.
Soaring inflation and the high uncertainty about the global economy with the Russian war in Ukraine could threaten economic growth, Icahn said.
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“I really don’t know if they can engineer a soft landing,” Icahn said. “I think there is going to be a rough landing... Inflation is a terrible thing when it gets going,” the investor noted.
By Tsvetana Paraskova for Oilprice.com
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Whether the steep rises in oil prices are due to geopolitical factors or economic factors or both, the global economy can only tolerate a Brent crude oil price ranging from $100-$110 a barrel. Any rises above $110 won’t be tolerated and would lead to global recession and demand destruction.
This will inflict a heavy blow on the global economy particularly the United States’ and the EU’s. The Irony Is that Western economies who are imposing the sanctions on Russia will suffer far more than Russia. Three reasons for that. The first is that a big chunk of Russian oil and gas exports go to China and India and will be sold at extremely high prices. The second reason is that Russia’s economy is virtually self-sufficient. The third is that the economies of Russia and China complement each other to a great extent. Any sanctioned item Russia wants, it can get it from or via China.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London