Fitch warns of inflationary headwinds from Middle East-driven crude rally

Higher oil prices would result in elevated inflation rates in 2024, with India, Turkey, and Poland experiencing the highest percentage point increases.

Fitch Ratings has warned that an escalation of the Middle East conflict disrupting oil supplies would jack up crude prices and, in turn, slow down the economic growth and foster inflation.

The global GDP growth is estimated to be 0.4 percentage points lower in 2024, with a more modest 0.1 percentage point decrease in 2025. The absence of a significant rebound suggests a potentially persistent moderate impact beyond the initial shock, according to the US-based rating agency.

To assess the potential impact of higher oil prices resulting from a disruption in the Middle East conflict, Fitch conducted a simulation using the Oxford Economics Global Economic Model. In this scenario, which assumes supply restrictions, the simulation considers oil prices averaging $120 a barrel (bbl) in 2024 and $100 in 2025.

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"Higher oil prices would dampen GDP growth in almost all the GEO’s ‘Fitch 20’ economies, although the impact would largely dissipate in 2025. The absence of a significant growth rebound in 2025 implies a longer-lasting, if generally moderate, impact on the GDP levels in most countries, which could affect assessments of potential growth," Fitch said.

The adverse growth impact in 2024 varies across countries. It ranges from 0.1 percentage points in Indonesia to 0.9 percentage points in Korea. The US, the Eurozone, and Japan experience impacts of 0.5 percentage points.

Among the major emerging market countries, the most substantial impacts would be observed in South Africa and Turkey, each experiencing a 0.7 percentage point reduction. On the other hand, Russia, and to a much lesser extent Brazil, would see a positive impact due to the significant role of oil production in these economies, it said.

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The scenario of higher oil prices would result in elevated inflation rates in 2024, with India, Turkey, and Poland experiencing the highest percentage point increases.

In contrast, developed economies would witness more moderate impacts, with the US expecting inflation rates to be around 2 percentage points higher than forecast by the end of 2024.

While the inflation impact is anticipated to be short-lived and corrected in 2025, Brazil and Mexico stand out as outliers, facing higher inflation rates in 2025.

In this scenario, the monetary policy response is expected to be relatively muted. A supply-side shock, resulting in increased price pressures through higher petrol prices and costs, would simultaneously reduce demand from both firms and households.

Central banks, all else being equal, would likely consider increasing policy rates to address the higher inflation but might also contemplate loosening policy in response to demand shortfalls, the rating agency said.

An oil price shock associated with the conflict in the Middle East could bring about tighter financial conditions, reduced business and consumer confidence, and corrections in financial markets.