Soaring gas prices, another headwind for the global economy
LONDON (Reuters) – Soaring gas prices that threaten to push up fuel bills in winter, hurt consumption and exacerbate short-term inflation is another blow to a global economy who has just recovered from the shock of the coronavirus.
The chaos in the gas market, which has driven prices up 280% in Europe this year and led to an increase of over 100% in the United States, is blamed on a range of factors ranging from low levels of storage to prices carbon through the reduction of Russian supplies.
For a graph on the surge in gas prices this year:
The tensions are so high that several lawmakers in the European Parliament have called for an investigation into what they believe could be market manipulation by Russian Gazprom.
Whatever the causes, the push has major implications for the market:
1 / GROWTH
Analysts say it’s too early to revise economic growth forecasts downwards, but a blow to economic activity seems inevitable.
Morgan Stanley believes the impact to the United States, the world’s largest economy, should be small. While more than a third of U.S. energy consumption in 2020 was supplied by natural gas, users were predominantly industrial, he notes.
Overall, however, higher gas prices increase the risk of stagflation – high inflation, low growth.
“It’s pretty clear that there is a growing sense of unease about the economic outlook as a growing number of companies consider the prospect of rising costs,” said Michael Hewson, chief market analyst at CMC Markets.
2 / INFLATION
Wholesale electricity prices in the euro area are reaching record highs, which could exacerbate inflationary pressures inflicted by COVID-related bottlenecks. In Germany, 310,000 households face an 11.5% increase in their gas bills, according to data released on Monday.
Noting that German ex-factory prices were already the highest since 1974, Citi analysts predicted a 5% rise in electricity and gas prices in January, adding 0.25 percentage points to inflation at consumption next year.
Higher food costs are another side effect, given the shortage of carbon dioxide that is used in slaughterhouses and to extend the shelf life of food. Reductions in fertilizer production could also push up food prices.
Goldman Sachs is forecasting an increase in demand for oil, with upside risk of $ 5 per barrel for its Brent price forecast for the fourth quarter of 2021 of $ 80 per barrel. Brent is currently trading at around $ 74. [O/R]
For a graph on oil prices:
3 / CENTRAL BANKS
Central banks are sticking to the line that the rise in inflation is temporary – Isabel Schnabel, a member of the board of the European Central Bank, said on Monday that she was satisfied with the widespread rise in inflation.
But as market-based and consumer-based measures of inflation expectations rise, gas prices will be on central banks’ radar.
“If we have higher inflation, transitional or structural, and slower growth, it will be a very difficult situation for markets and central banks to assess, navigate and communicate,” said Piet Haines Christiansen, strategist in chief at Danske Bank.
For a graph on inflation expectations:
This week’s central bank meetings could test the resolve of policymakers. Particularly in the spotlight is the Bank of England meeting on Thursday, given that UK inflation has just hit a nine-year high.
With UK producer price inflation soaring, shipping costs showing little sign of cooling, commodity prices on the rise and vacancies at 1 million, there are more more likely the higher prices will last longer, said Susannah Streeter, senior analyst at Hargreaves Lansdown.
“If they do, more (BoE) members could quickly vote for a rate hike sooner than expected next year, but that would be an unpopular move with impending tax hikes already difficult for many consumers to digest. “she said.
4 / STATE RESCUE
Britain is considering offering state-guaranteed loans to energy companies after major suppliers requested support to cover the cost of supporting clients of companies that have gone bankrupt under the impact of gas prices. One company, Bulb, has reportedly called for a bailout.
France is planning one-off payments of 100 euros ($ 118) to millions of households to help them pay their energy bills.
“The emerging story of the UK energy sector will soon be more relevant to the European market than Evergrande,” said Althea Spinozzi, senior fixed income strategist at Saxo Bank.
And in a week filled with central bank meetings, she added that the markets were “right to be concerned.”
5 / COMPANIES
Spain shocked the utilities sector last week by redirecting billions of euros in profits from energy companies to consumers and capping increases in gas prices. Iberdrola and Endesa’s earnings were estimated by RBC at one billion euros, and the companies’ shares were sold off heavily.
Since the move, investors have worried about contagion to other countries, Morgan Stanley said. While considering these fears as exaggerated, the bank acknowledged that there was a risk of squeezing the margins of European public services in the months to come.
Sector shares are down for the third week in a row
For a chart on turmoil in the gas sector, a headwind for European equities:
Reporting by Dhara Ranasinghe; graphics by Saikat Chatterjee and Dhara Ranasinghe; additional reports by Yoruk Bahceli and Sujata Rao; Editing by Sujata Rao and Hugh Lawson