Economy

$100 Oil Threatens to Compound World Economy's Inflation Shock – Financial Post

Published

3 years ago

February 13, 2022

Bloomberg News

Enda Curran and Rich Miller

(Bloomberg) — Oil’s surge toward $100 a barrel for the first time since 2014 is threatening to deal a double-blow to the world economy by further denting growth prospects and driving up inflation.

That’s a worrying combination for the U.S. Federal Reserve and fellow central banks as they seek to contain the strongest price pressures in decades without derailing recoveries from the pandemic. Group of 20 finance chiefs meet virtually this week for the first time this year with inflation among their top concerns.

While energy exporters stand to benefit from the boom and oil’s influence on economies isn’t what it once was, much of the world will take a hit as companies and consumers find their bills rising and spending power squeezed by costlier food, transportation and heating.

According to Bloomberg Economics’ Shok model, a climb in crude to $100 by the end of this month from around $70 at the end of 2021 would lift inflation by about half a percentage point in the U.S. and Europe in the second half of the year.

More broadly, JPMorgan Chase & Co. warns a run-up to $150 a barrel would almost stall the global expansion and send inflation spiraling to over 7%, more than three times the rate targeted by most monetary policy makers.

“The oil shock feeds into what is now a broader inflation problem,” said long-time Fed official Peter Hooper, who’s now global head of economic research for Deutsche Bank AG. “There’s a decent chance of a significant slowing of global growth” as a result.

Oil is about 50% higher than a year ago, part of a broader rally in commodity prices that’s swept up natural gas too. Among the drivers: A post-lockdown resurgence in worldwide demand, geopolitical tensions ignited by oil giant Russia and strained supply chains. Prospects for a renewed Iranian nuclear deal have at times cooled the market.

Still, the rise has been piercing. Just two years ago, oil prices plunged briefly below zero.

Fossil fuels — oil, as well as coal and natural gas — provide more than 80% of the global economy’s energy. And the cost of a typical basket of them is now up more than 50% from a year ago, according to Gavekal Research Ltd., a consultancy.

The energy crunch also compounds the ongoing squeeze in global supply chains, which drove up costs and delayed raw materials and finished goods.

Vivian Lau, who runs a global logistics company based in Hong Kong, said her customers are already closely watching rising fuel costs.

“The price of oil is definitely a concern,” said Lau, vice chair and group chief executive officer of Pacific Air Holdings. “The increase is happening at a time when air freight prices are already very high.”

Economists are war gaming scenarios from here.

Goldman Sachs Group Inc., which sees oil at $100 in the third quarter, estimates a 50% increase lifts headline inflation by an average of 60 basis points, with emerging economies hit most.

The International Monetary Fund recently raised its forecast for global consumer prices to an average 3.9% in advanced economies this year, up from 2.3%, and 5.9% in emerging and developing nations.

“With inflation currently at multi-decade highs and uncertainty surrounding the inflation outlook already unprecedented, the last thing the recovering global economy needs is another leg higher in energy prices,” HSBC economists Janet Henry and James Pomeroy wrote in a Feb. 4 report. “Yet that is what it is getting.”

China, the world’s biggest oil importer and goods exporter, has so far enjoyed benign inflation. But it’s economy remains vulnerable as producers are already juggling high input costs and concerns over energy shortages.

With price pressures proving more tenacious than earlier expected, central bankers are now prioritizing inflation fighting over demand support. U.S. consumer prices surprising to a four-decade high sent shocks through the system, increasing bets the Fed will raise rates seven times this year, a faster pace than earlier expected.

Bank of England Governor Andrew Bailey this month partly justified the decision to raise U.K. interest rates by pointing to a “squeeze from energy prices.” European Central Bank President Christine Lagarde said recently that officials will “carefully examine” how energy prices will impact the economy as they signal a shift toward tightening. The Reserve Bank of India on Thursday also flagged oil prices as a risk.

To be sure, the world economy is no longer the oil guzzler it was during previous decades, especially the 1970s, and alternative energy offers some buffer. Other pandemic-era insulators include swelling household savings and higher wages amid a tight labor market.

In the U.S. the emergence of the shale oil industry means its economy is less vulnerable to fuel shocks: While consumers are paying more for gasoline, domestic producers are earning more.

Mark Zandi, chief economist for Moody’s Analytics, estimates that each $10 per barrel increase shaves 0.1 percentage point off of economic growth the following year. That compares with a 0.3 to 0.4 point blow prior to the fracking revolution.

Other oil producers will have reason to celebrate, too.

Russia’s budget, for example, could reap more than $65 billion in extra revenue this year, helping buffer the Kremlin against possible sanctions over Ukraine. Other emerging market producers would benefit, as would Canada and Middle Eastern economies.

But for most consumers, and central bankers, much rides on how fast and how far energy goes, particularly if economies lose momentum globally.

“A continued rapid rise can raise risks of recession-like conditions in some countries, especially if fiscal policy is also tightening notably,” said Priyanka Kishore of Oxford Economics Ltd., which estimates that every $10 per barrel increase in oil eats around 0.2 percentage points from world growth.

“Hopefully,” she said, “this is not the straw that breaks the camels back.”

Bloomberg.com

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Economy

B.C.’s debt and deficit forecast to rise as the provincial election nears

Published

2 days ago

September 10, 2024

Anne Joseph

VICTORIA – British Columbia is forecasting a record budget deficit and a rising debt of almost $129 billion less than two weeks before the start of a provincial election campaign where economic stability and future progress are expected to be major issues.

Finance Minister Katrine Conroy, who has announced her retirement and will not seek re-election in the Oct. 19 vote, said Tuesday her final budget update as minister predicts a deficit of $8.9 billion, up $1.1 billion from a forecast she made earlier this year.

Conroy said she acknowledges “challenges” facing B.C., including three consecutive deficit budgets, but expected improved economic growth where the province will start to “turn a corner.”

The $8.9 billion deficit forecast for 2024-2025 is followed by annual deficit projections of $6.7 billion and $6.1 billion in 2026-2027, Conroy said at a news conference outlining the government’s first quarterly financial update.

Conroy said lower corporate income tax and natural resource revenues and the increased cost of fighting wildfires have had some of the largest impacts on the budget.

“I want to acknowledge the economic uncertainties,” she said. “While global inflation is showing signs of easing and we’ve seen cuts to the Bank of Canada interest rates, we know that the challenges are not over.”

Conroy said wildfire response costs are expected to total $886 million this year, more than $650 million higher than originally forecast.

Corporate income tax revenue is forecast to be $638 million lower as a result of federal government updates and natural resource revenues are down $299 million due to lower prices for natural gas, lumber and electricity, she said.

Debt-servicing costs are also forecast to be $344 million higher due to the larger debt balance, the current interest rate and accelerated borrowing to ensure services and capital projects are maintained through the province’s election period, said Conroy.

B.C.’s economic growth is expected to strengthen over the next three years, but the timing of a return to a balanced budget will fall to another minister, said Conroy, who was addressing what likely would be her last news conference as Minister of Finance.

The election is expected to be called on Sept. 21, with the vote set for Oct. 19.

“While we are a strong province, people are facing challenges,” she said. “We have never shied away from taking those challenges head on, because we want to keep British Columbians secure and help them build good lives now and for the long term. With the investments we’re making and the actions we’re taking to support people and build a stronger economy, we’ve started to turn a corner.”

Premier David Eby said before the fiscal forecast was released Tuesday that the New Democrat government remains committed to providing services and supports for people in British Columbia and cuts are not on his agenda.

Eby said people have been hurt by high interest costs and the province is facing budget pressures connected to low resource prices, high wildfire costs and struggling global economies.

The premier said that now is not the time to reduce supports and services for people.

Last month’s year-end report for the 2023-2024 budget saw the province post a budget deficit of $5.035 billion, down from the previous forecast of $5.9 billion.

Eby said he expects government financial priorities to become a major issue during the upcoming election, with the NDP pledging to continue to fund services and the B.C. Conservatives looking to make cuts.

This report by The Canadian Press was first published Sept. 10, 2024.

Note to readers: This is a corrected story. A previous version said the debt would be going up to more than $129 billion. In fact, it will be almost $129 billion.

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Economy

Mark Carney mum on carbon-tax advice, future in politics at Liberal retreat

Published

2 days ago

September 10, 2024

Anne Joseph

NANAIMO, B.C. – Former Bank of Canada governor Mark Carney says he’ll be advising the Liberal party to flip some the challenges posed by an increasingly divided and dangerous world into an economic opportunity for Canada.

But he won’t say what his specific advice will be on economic issues that are politically divisive in Canada, like the carbon tax.

He presented his vision for the Liberals’ economic policy at the party’s caucus retreat in Nanaimo, B.C. today, after he agreed to help the party prepare for the next election as chair of a Liberal task force on economic growth.

Carney has been touted as a possible leadership contender to replace Justin Trudeau, who has said he has tried to coax Carney into politics for years.

Carney says if the prime minister asks him to do something he will do it to the best of his ability, but won’t elaborate on whether the new adviser role could lead to him adding his name to a ballot in the next election.

Finance Minister Chrystia Freeland says she has been taking advice from Carney for years, and that his new position won’t infringe on her role.

This report by The Canadian Press was first published Sept. 10, 2024.

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Economy

Nova Scotia bill would kick-start offshore wind industry without approval from Ottawa

Published

2 days ago

September 10, 2024

Anne Joseph

HALIFAX – The Nova Scotia government has introduced a bill that would kick-start the province’s offshore wind industry without federal approval.

Natural Resources Minister Tory Rushton says amendments within a new omnibus bill introduced today will help ensure Nova Scotia meets its goal of launching a first call for offshore wind bids next year.

The province wants to offer project licences by 2030 to develop a total of five gigawatts of power from offshore wind.

Rushton says normally the province would wait for the federal government to adopt legislation establishing a wind industry off Canada’s East Coast, but that process has been “progressing slowly.”

Federal legislation that would enable the development of offshore wind farms in Nova Scotia and Newfoundland and Labrador has passed through the first and second reading in the Senate, and is currently under consideration in committee.

Rushton says the Nova Scotia bill mirrors the federal legislation and would prevent the province’s offshore wind industry from being held up in Ottawa.

This report by The Canadian Press was first published Sept. 10, 2024.

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