The threat of an Oil price shock – Standard Chartered

Oil price increases have a greater impact on the global economy than Oil price declines. The main impact is felt via an immediate rise in headline inflation. Transport shares, net fuel imports, public debt/GDP and trade integration are key factors to watch. Jordan, South Africa and Thailand are vulnerable; UAE, Switzerland and Peru less so, Standard Chartered's economists Madhur Jha and Ethan Lester note.

Impact felt primarily through headline inflation

"Escalating tensions between Israel and Iran recently have seen Brent Oil prices reverse almost all of the softness in place since the start of the year. A move above USD 90 per barrel (bbl) would constitute an Oil price shock. Oil price rises have a bigger impact on growth than Oil price declines. IMF estimates suggest that a 10% rise in Oil prices lowers global GDP growth by 0.1-0.2ppt, while a fall in Oil prices only raises growth by half of that. So far, we think the net impact on the global economy is likely to be mildly negative, with lower growth and higher inflation."

"Historically, Oil price shocks are reflected in headline CPI inflation within a quarter. World Bank estimates suggest that a 10% increase in Oil prices raises headline CPI inflation by 0.4ppt in a median economy. The impact on core inflation, however, is much smaller, reflecting central bank credibility."

"We list several indicators that best determine which economies are likely to see higher inflationary pressures from an Oil price shock. These include net fuel imports, trade integration, fiscal space, the share of transport in CPI baskets, and energy subsidies. Economies with less fiscal space like Jordan, South Africa and France have limited ability to offset the inflation impact from an Oil shock, while Thailand and Hungary are vulnerable due to trade openness but use subsidies to manage the impact. The UAE, Switzerland and Latin American countries like Peru are relatively more resilient."