Q3 Economic review: oil, chips and hikes

Oil, chips and hikes

The energy price backdrop remains volatile and uncertain leaving plenty of uncertainty around the economic forecasts too. So far, global growth is showing surprising resilience, partly reflecting the AI buildout. Although several supports for growth from H1 remain in place, we would not be surprised to see somewhat slower growth in H2 as higher inflation weighs on real incomes and given higher market interest rates since we last updated our forecasts in July. Our inflation forecasts are higher than they were and we have added a few more rate hikes into our central bank profiles. However, this is still not the kind of booming, demand-driven inflationary backdrop that warrants central banks going on a major hiking spree. Risks to the outlook remain two-sided.

Resilience still a feature

Higher energy prices do not seem to be significantly holding back major developed economies. That is less surprising in the US than in Europe, but we would have expected consumers in particular to have shown more sign of strain given the hit to real incomes. Central banks haven’t hiked much (which has helped activity growth) and fiscal policy and AI have provided well- timed offsetting support for global growth. We still see downside risks to the consumer outlook, but our central growth forecasts recognise the resilience seen this year and the likelihood of that continuing in the near-term.

Inflation – uneven risks

However, outcomes in the Middle East remain uncertain resulting in sizeable two-sided risk for the inflation outlook. The outlook for refined product supply is as important as crude and even if crude prices fall, we worry about how long it will take to normalise supply and prices for the oil-derived products that are actually consumed by businesses and households. We continue to worry about the potential for higher food prices in the wake of the energy price shock. However, we still expect the second-round effects of higher oil prices to be relatively modest based on evidence so far. Medium-term, we still see outcomes for inflation as skewed to the upside in coming years given the climate, geopolitical, fiscal and demographic backdrop.

More, but not many, rate hikes expected

Further rate hikes this year have become more likely as inflation has remained elevated. Central banks perceive enough risk of persistent inflation to hike or sound on the brink of hiking; alongside relatively resilient global growth, there is little to stand in the way of central banks raising rates into restrictive territory to reduce inflation risk. However, there isn’t the justification in their forecasts for the economy, or in the incoming data (at least not yet), for a more significant hiking cycle.

Risks are two-sided to the outlook

Beyond energy prices, there are a host of other risks that we are monitoring, from the impact of AI on inflation, the potential for labour market tightening and risks from tighter financial conditions, to broader worries around fiscal sustainability.

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