The 100 dollars mark the threshold from which the price of a barrel of Brent oil, the reference crude in Europe, can have significant effects on the Spanish economy, pushing growth downward and inflation upward. This scenario, which was not initially the one that the experts found most plausible in a year in which a slowdown in the global economy is expected, is no longer ruled out. The reopening of the Chinese economy, the second largest oil demander globally by banks behind the United States, and the decision of the OPEC countries to cut production have put governments, organizations and centers around the world on notice.
OPEC+, which brings together members of the cartel and other partners such as Russia or Mexico, announced last week a cut in daily production of 1.66 million barrels starting in May, which led Brent crude to once again exceed the barrier of the 85 dollars. This reduction was added to the half million barrels that Russia will also withdraw from the market until the end of the year and to the two million barrels that the group has already stopped extracting since last October. This decision may have a “significant” impact on Spanish inflation depending on how it is carried out.
Oil and fuels represent around 5% of the CPI index, although their indirect effects are very important because fuels are the backbone of practically the entire productive apparatus, Raymond Torres, Funcas’s director of the situation, explains to ‘La Información’. The moderation in the price of gas and other raw materials has allowed the annual inflation rate to calm down in recent months. The so-called base effect would have appeased the general CPI to 3.3% in March, according to the data provided by the National Institute of Statistics, given that in the same month last year the price of electricity rose 33.1% year-on-year and transport 18.6%, pressured by gasoline and diesel.
However, this de-escalation of inflation is still “very slow, very uncertain,” says Torres. In fact, the Fundación de las Cajas de Ahorros has been warning about the possibility of sawtooth inflation between now and the end of the year and government sources have confirmed to this newspaper that they foresee a very volatile behavior of prices for what remains exercise although with half the rate of inflation in 2022 and may cause a reaction from the European Central Bank.
The issuer was expected to choose to announce moderate increases in the price of money in its next meetings, but if oil prices begin to rebound “it may question this path of moderation and perhaps more consequent increases could occur”, despite the abrupt the European Commission on labor issues. Conversely, if the cost of ‘black gold’ does not rise excessively and the downward trend in inflation continues, “we could be witnessing the latest interest rate hikes” by some central banks that have declared data -dependent when it comes to putting their monetary policy into practice, says Mario Catalá, director of discretionary management at the firm Portocolom AV.
The impact of the Chinese reopening on oil and inflation
Another of the elements that would exert upward pressure on the price of a barrel of crude oil -until it pushed it to around 100 dollars- would be for the Chinese recovery to gain intensity. In fact, the International Energy Agency (IEA) itself, which forecasts a record in crude oil consumption this year, expects the giant to account for almost half of the estimated increase in demand. In its latest quarterly report on the Spanish economy, the Bank of Spain itself referred to the double impact (positive or negative) that the Chinese reopening would have on prices. On the one hand, greater growth in the world’s second largest economy would boost global demand, especially for raw materials, which would tend to push inflation rates upwards.
On the other hand, the reopening of the Asian giant could accelerate the disappearance of bottlenecks in supply chains and strengthen the capacity of global supply to meet demand. This route would serve to slightly reduce the current high inflationary pressures. Which of these channels will dominate “is very uncertain” and will arise, according to the regulator, from the very composition of the Chinese economic recovery. Axel Botte, global market strategist at manager Ostrum AM, recalls that reports of economic activity in both Europe and China certainly improved in the services sector in March and eclipsed a slower recovery in manufacturing.
So much so, that some of the country’s banks are working with a GDP growth forecast of 6% for this year, which would lead them to advance twice as much as last year. Consumption will be key to this, as it will be supported by improved income, confidence and mobility. Kevin Kang, KPMG’s chief economist for China, expects its economy to grow at 5.7% this year, once again becoming a key driver of global activity. In the consultancy they explain that the Government of Xi Jinping has set the goal of creating some 1,200 million new urban jobs this year, the most ambitious objective in the country’s history, which would reduce the unemployment rate in cities around the 5.5%
One of the keys is in youth employment, since in 2023 11 million students are expected to graduate in China, a record number. In addition, the Beijing Executive is giving priority to the recovery and expansion of domestic consumption. For now, spending during the New Year has registered a solid recovery and households have excess savings from 10 trillion yuan vacations accumulated in the pandemic. “The reopening and economic recovery will contribute to improving consumer confidence and it is possible that part of the excess savings will be released, which should support the recovery of consumption,” they point out from the firm.
