Prolonged economic pain

BIZLINKS - Rey Gamboa - The Philippine Star

The short term view on oil nowadays is that a new equilibrium is at a nearing point, which means that prices will move within a tighter range away from the huge upward swings that the global economy experienced after Russia attacked Ukraine last February.

The average price within this narrower bandwidth will still be much higher than the $60 per barrel price the world saw pre-pandemic, but will rest easy under $100 per barrel. This will provide economic planners some respite in reducing uncertainties when doing projections.

Falling crude prices in recent weeks, after KSSPINV above $100 a barrel, is attributed to a number of reasons.

The threat of a global recession or possibly stagflation weighs heaviest, and the recent decision of the US Fed to hike interest rates by another 0.75 points reflects a heavy-handed move by the world’s largest economy to slow down its overheating economy and curb heightened inflation levels.

China’s newly released low import figures likewise reflect its struggle to keep the economy moving despite surges in its COVID-19 infections and its reactionary lockdowns in economic centers of the country. China barely managed to keep its gross domestic production (GDP) during the second quarter of the year in positive territory, reporting growth at 0.4 percent compared to the same period last year.

‘Embedded’ inflation

Further, the Bank of England has warned its citizens to brace for a prolonged economic downturn after announcing a fresh round of interest rate hike resulting in its biggest cumulative adjustment in 27 years. BoE warned of the risk of “embedded” inflation, with new estimates now expected to hit over 13 percent.

A prolonged reign of high food and fuel prices is expected in England for much of next year, and inflation will only likely return to the target of two percent in 2023. The economic downturn will mean needing more money to buy the same amount of goods for households, but increased mortgage rate payments may further squeeze such spending.

The rest of Europe is facing dire circumstances, too, with countries like Germany recalibrating their energy sourcing to mean less fuel imports from Russia whose invasion of Ukraine and aggression statements of bringing back the golden age of the United Soviet Socialist Republic rankled fear.

In less developed economies where public debt has surged to unmanageable levels, payment defaults are becoming imminent. Such are added strong signals that parts of the world will likely plunge further into economic misery, further exacerbating poverty levels.

OPEC+ muscle

Key to how oil prices will perform in the next few months will continue to be in the hands of OPEC+, which includes Russia. It had previously agreed to increase output by 600,000 barrels a day in July and August to ease rising inflation, but only by 100,000 barrels a day only in September.

A united OPEC+, which together accounts for 40 percent of the world’s reserves, has the power to tinker with the global energy balance. When oil prices fall below its expectation, it decides to squeeze the taps to reduce crude production output.

While minding their individual incomes from crude sales, OPEC+ member countries agree that a united stand on pricing and production whenever possible is necessary to keep their hold on power and a steady revenue stream.

OPEC+ is back in the saddle after seeing crude prices plunge to almost worthlessness during the height of the pandemic when the world economy came to a halt. During that time, in May 2020, OPEC+ decided to slash production by 10 million barrels a day as storage facilities filled to the brim.

The oil cartel is now slowly bringing production up, and is perceived to support a price range that flirts at $100 a barrel. Mature economies dependent on fossil fuels, however, feel that this level will bring prolonged pain to their constituents, mainly through high food and fuel prices.

West’s battle cry shift

If most of the world started issuing a call to live with the virus starting in 2021 after vaccines against COVID-19 proved to be effective in providing adequate protection, the battle cry nowadays has shifted to bearing out the pain of high inflation.

Governments that have made a bold decision to pursue a major decisive shift from fossil fuels to alternative renewable energies within the decade are asking their citizens to expect the worst for a one or two more years until the worst of the transition stage is over.

During these trying times, rich countries in the West like the US, England, and Germany are preparing for new relief packages that will help their constituents and businesses weather out the worst that is to come, even after having spent billions in COVID relief funds during the last two years.

Bearable pain

The Philippines, much like the rest of Southeast Asia, finds itself in a more enviable lot, even with elevated inflation levels. We may not be commodity export powerhouses like Thailand or India, but we continue to enjoy the benefits of a steady human resource deployment to almost all parts of the world.

A continued strong inflow of remittances will keep our consumption-based economy strong enough to withstand high food and energy prices during the crucial next two years. Despite the double-digit increases in pork and chicken prices, Filipinos are still finding the money to put food on the table, even if it means reducing the portions that are priced higher.

Compared to Western countries, our inflation pain seems to be more bearable.

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Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. For a compilation of previous articles, visit www.BizlinksPhilippines.net.



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