Global Economy Gets Tailwind from Falling Energy Prices

Global Economy Gets Tailwind from Falling Energy Prices

Lower natural-gas prices could boost European output by 1.5%, economists estimate.

The global economy is in turmoil due to energy prices for the second time in a year.

This time, the news is positive. Dropping oil and natural gas prices are boosting economic growth, putting money in consumers’ pockets, boosting confidence, and relieving pressure on government budgets.

It is the opposite of the energy price shock from a year ago when Russia’s invasion of Ukraine sparked worries about a severe recession in Europe and beyond.

The unexpectedly positive economic data in the United States this year can be partially explained by declining energy prices. and economists assert that Europe. According to S&P Global’s business surveys, a closely watched predictor of future growth, supply-chain managers are more optimistic than they have been in many months on both sides of the Atlantic.

Due to central banks’ efforts to lower historically high inflation, higher borrowing costs are being offset by the windfall for individuals, businesses, and governments.

As markets adjusted to Western embargoes on Russian supply and oil was released from emergency reserves, the price of a barrel of oil has decreased by more than a third since the middle of last year, to about $77 from $121, below its prewar level. Some economists warned a reopening Chinese economy would push oil prices higher, but that hasn’t happened yet.

Thanks to warm weather, conservation efforts, and increased imports, benchmark wholesale natural gas prices in Europe have fallen by almost 90% since last summer, reaching their lowest level since 2021.

Even though advanced economies have decreased the amount of energy consumed per unit of output since the 1970s, energy is still a necessary component of almost all goods and services, giving it a significant role in society.

“It’s difficult to overstate how important this is in terms of the macroeconomic outlook for Europe,” said Neil Shearing is the London office of Capital Economics’ chief economist.

According to Capital Economics, falling natural gas prices for Europe will result in enormous cost savings, or about 3.5% of Italy’s GDP this year and 2% of GDP for Germany, Portugal, and Spain.

However, government subsidies worth hundreds of billions of dollars that were implemented last year to lessen the impact on households and businesses complicate the impact on output. These subsidies lessened the effects of the increase in energy prices, which led to a subsequent decline. For that reason, the impact on output will be about half the actual cost savings, Mr. Shearing said. “We’ve moved from a situation where we were expecting quite a deep recession to expecting a mild, shallower and shorter-lived one,” he said.

Capital Economics and Berenberg Bank estimate that the energy stimulus could increase eurozone output by 1.5%, or roughly the same as a year’s worth of growth. According to Berenberg, this year’s growth forecast for the eurozone’s economy is now 0.7%, up from a 1.3% contraction predicted in October. Economists predicted that the United States would also gain, albeit to a lesser extent.

In recent months, consumer confidence has sharply increased on both sides of the Atlantic, reversing declines from last year. According to economists, this could mean that households spend more of the funds they had set aside for the pandemic. This would further stimulate the economy.

According to Berenberg Bank Chief Economist Holger Schmieding, the blow to consumer and business confidence in Europe last year was at least as severe as the reduction in household disposable income.

Retail sales increased by 1.7% from December in Italy, a country that imports a lot of natural gas. That was one of the quickest increases since May 2020, when economies were reopening following pandemic lockdowns. According to the federal statistics agency, production in energy-intensive sectors in Germany increased 6.8% in January compared to the previous month after declining by one-fifth the previous year.

“It was only the gas price explosion and concerns of gas shortages prevalent over last summer and winter that brought the eurozone to stagnation last year,” said Mr. Schmieding. “This shock is currently shifting into reverse.”

In contrast to Europe, where higher energy prices shift money from citizens to foreigners, the U.S. is a net energy exporter. Therefore, higher prices have less clear results because they transfer funds from American households to domestic energy producers and their shareholders.

However, households are more likely to spend than oil producers, so even in the United States., higher oil prices on net subtract from growth. According to Morgan Stanley, a year-long increase in oil prices can reduce real household spending by up to 3.7%.

As a result of increased disposable income, the bank claimed that the drop in gas prices in the second half of last year more than offset the impact of higher interest rates during that time.

In many countries, governments provided wider support alongside subsidies per unit of energy use, including cash handouts. Households in the United Kingdom receive a flat government payment of £400, or roughly $480. France’s government raised income tax brackets to increase citizens’ discretionary spending.

The majority of central banks are attempting to determine how far interest rates should be raised. The decline in energy prices has negative and positive effects. One benefit is that it brings down headline inflation. In order to avoid a wage-price spiral, unions may be forced to accept smaller pay increases.

On the other hand, lower energy prices act like a tax cut, boosting consumer spending, which might add to inflation pressure outside of energy.

“What [households] aren’t spending on energy, they’re going to spend on something else,” In a panel discussion last month, Catherine Mann, a member of the Monetary Policy Committee of the Bank of England, said.

“That transforms something I don’t have control over, like the price of energy from abroad, into something that looks a lot more like something I do have control over, like domestic inflation.”


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