Recovery in danger due to surge in crude oil prices

Economists expect the trade deficit to widen as commodity prices remain elevated amid the Russia-Ukraine conflict. Food and metal prices have risen. Brent crude oil prices have crossed the $110 per barrel mark.

True, India’s exposure to Russia for oil imports and exports of other goods is low. Nevertheless, geopolitical tensions will put pressure on global supply-chains and trade channels, adding pressure to prices. This would jeopardize the global economic recovery. In short, the risks of recovery are increased.

What are the implications? “Who is affected by the rise in commodity prices, especially the crude oil order, is largely well established. Clearly, globally, the risk appetite is negative for business outlook and consumer confidence, and if it persists over the long term, it will weigh on the global recovery,” said Rahul Bajoria, chief economist for India at Barclays. Economic Impact on Individuals Some countries will face both growth and inflationary shocks, while some will face only inflationary shocks, he said.

The uncertainty surrounding the Russia-Ukraine situation has prompted many analysts to raise their oil price forecast to $120-$150/barrel. Warren Patterson, Head of Commodities at ING, said on March 2, “If we see a scenario where Russian energy exports are fully targeted, it could lead to a situation where we can expect Brent to be priced at $150 a barrel this year.” Let’s see you doing business.” pay attention.

Russia is a significant part of the global oil market. In 2021, it was the third largest oil producer and second largest oil exporter.

India imports more than 80% of its oil requirements and any increase in its price, therefore, leads to inflation and increases the import bill. Against this background and taking a look at the February trade deficit data, the expectations on the current account deficit (CAD) front are quite gloomy. Barclay’s estimates show that for every $10 per barrel increase in the price of crude, India’s CAD increases by $10 billion, or about 0.3% of gross domestic product (GDP).

According to Emkay Global Financial Services, CAD could exceed 2.5%+ of GDP in FY 2013, with oil remaining above $100/barrel. “As of the calendar year 2022, the Indian Rupee (INR) has been the worst performing EM Asian FX. A higher twin deficit, global/domestic headwinds and a possible shift in global risk appetite could continue to put pressure on the INR,” economists at Emkay said in a March 3 report.

Despite a gloomy outlook on global economic growth, US Federal Reserve Chairman Jerome Powell hinted at a 25 basis points interest rate hike at the March 14-15 central bank meeting, continuing inflationary pressure. One basis point is 0.01%.

As such, a protracted war is a threat to the inflation outlook of global central banks. The rise in oil prices is likely to delay the global economic recovery.

“More often than not, Fed tightening and oil spikes lead to a slowdown in the global economy. This time around, the economic recovery is badly divided – prices versus volumes; goods versus services; Edelweiss Securities Ltd. economists said in a March 2 report, US versus EM and large business versus small, even global debt is at a higher level.

According to the report, the downside risk to the global economy is significantly higher, unless the Fed releases tightening in the form of a crude spike, citing a lack of demand.