Global growth faces recession risk if oil price stays elevated

Debate over ‘global recession’ is again back on the table. Last time, the world was able to narrowly escape a recessionary environment during the COVID pandemic period. The ongoing Iran versus Israel & US war in the West Asian region and its spillover impact over GCC (Gulf Cooperation Council) nations have again heightened the risk of a global recession in the coming quarters.

Larry Fink, CEO of BlackRock- one of the biggest multinational investment management corporation of the US- said to a private TV channel,”If Iran remains a threat and oil prices stay high it will have profound implications for the world economy.” According to him, the world economy could slip to recession if the crude oil prices touch $150 per barrel and stayed there for long.

A report from trade intelligence platform, Kpler has estimated that oil prices could go above $150 per barrel if the US-Iran conflict drags into April. With no signs to an end of the ongoing West Asia conflict, the war between Iran versus Israel & the US is very much likely to be dragged to the net month. If that happens, then a deep slowdown in the global economy can’t be ruled out. Notably, the brent crude is currently hovering around $105 per barrel in NYMEX of now. The ripple effect of high oil prices has already been visible across various nations. Several countries have started rationing the supply of fuel (petrol, diesel & LPG) to households and commercial organisations. Countries like Philippines have announced National Emergency in the energy segment. Not a single nation in the world is immune to spike in the oil prices as crude oil sits at the very core of global economy. Multiple sectors are currently reeling under the impact of high fuel prices. Airlines companies are cancelling less profitable routes, while manufacturing companies are forced to reduce production owing to energy shortage in running plants. Hospitality sector has been one of the worst hits in the economy owing to trip cancellations and shutting down of hotels and restaurants.

No sector seems to be insulated from the wrath of this conflict. For households, the fear of inflation is real. Food prices across the spectrum have started moving up, creating an inflationary environment. If inflation becomes a key risk, then central banks are likely to hold on to interest rate cuts or even start thinking of raising interest rate. If this happens, entire economy will stall. So, the risk of a recession is real.

For India, which is the fastest growing large economy in the world, such rise has several repercussions. Though India has not seen any shortage of petrol, diesel and ATF among others, these commodities are coming at a higher price. The major concern area is the supply of LPG, for which India is critically dependent on West Asian nations. Against this backdrop, risk of an inflationary environment rises, which has been benign in the past years. Though India is doing a critical balancing act in the ongoing conflict to ensure smooth supply of crude oil and LPG, the restricted movement at Straight of Hormuz remains an area of deep concern. Unless shipping becomes free as it used to, India’s economic vulnerabilities will rise in coming quarters.

Job losses, inflation and high interest rate can be resultant impact if the oil prices stay elevated. It is, therefore, important that the West Asia conflict finds a solution as soon as possible for sustaining the global growth.