Oil barrels

Geopolitical conflict that produces a spike in oil prices would hurt global economic growth and boost inflation in 2024, says Fitch Ratings.

In a new report, the rating agency sketched out its analysis of the impact of higher oil prices in a scenario where conflict in the Middle East disrupts oil supplies.

Its current forecast assumes that oil averages US$75/barrel in 2024 and US$70 in 2025. But, in a scenario where supply disruptions drive oil prices up to US$120/bbl in 2024 and US$100/bbl in 2025, Fitch said global GDP growth would be curbed by 0.4 percentage points in 2024, and 0.1 point in 2025.

“Higher oil prices would dampen GDP growth in almost all the [20 economies it forecasts], although the impact would largely dissipate in 2025,” Fitch said — with growth in the U.S., Europe and Japan all reduced by 0.5 points in 2024.

Canada is only projected to see a 0.2-point reduction in 2024 GDP in this scenario.

“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.

In a scenario where an oil price shock also leads to tighter financial conditions, lower business and consumer confidence, and results in a correction in financial markets, the impact of higher oil prices would be greater, Fitch said.

For instance, if the shock also prompted a 10% drop in equity prices in the first half of 2024, Fitch forecasted a 0.6 percentage point drop in world GDP.

At the same time, headline inflation would get a temporary boost from higher oil prices too, Fitch noted.

“The inflation impact would be short-lived and partly offset by lower-than-forecast inflation rates in 2025,” it said.

In this scenario, central banks likely wouldn’t respond aggressively “because a supply-side shock would increase price pressures through higher petrol prices and costs, but reduce demand from firms and households,” it said.

“However, after the severe global inflation shock of the past two years, a renewed rise would significantly challenge central banks’ efforts to bring inflation back to target and could boost inflation expectations,” it added.