Limited fallout from oil shock – Commerzbank

Finance

Limited fallout from oil shock – Commerzbank

Commerzbanks Bernd Weidensteiner and Christoph Balz argue that the US economy is better positioned to absorb higher Oil prices than in past crises. Lower oil intensity, near self-sufficiency and experience from the 2022 shock support resilience. Their base scenario sees only a Q2 growth dip, with US GDP expanding 2.4% in 2026 and 2.3% in 2027.

Growth hit seen as temporary and contained

“Following Russias invasion of Ukraine in February 2022, oil prices also rose sharply. This served, in a sense, as a ”test run“ to see whether the U.S. economy could now cope better with an oil price shock than it did in the 1970s. U.S. growth was barely affected; at most, the decline in inflation following the COVID-19 shock was delayed.”

“However, even during the oil crises of the 1970s and early 1980s, the oil price shock alone was hardly enough to push the economy into recession. Rather, inflation was already on an upward trend as a result of the overly expansionary monetary and fiscal policies of the 1960s.”

“In the current case, the greatest risk is that inflation expectations will break free from their anchor. Fed Chair Powell recently pointed out that inflation has now been above the Feds 2% target for five years.”

“A renewed price shock could therefore force the Fed to adopt a more restrictive policy. With loosened inflation expectations, the monetary policy textbooks recommendation to ”look through“ supply-driven price shocks may not be feasible.”

“Under these circumstances, the U.S. economy is likely to get off with a dip in growth in the second quarter, partly due to the strong underlying growth trend.”