Global outlook hinges on energy outlook

The OECD recently released their latest economic outlook – Confronting the Crisis – which suggests a modest outlook ahead for the global economy. Global economic growth is expected to moderate to 2.2% in 2023 (down from 2.8% in their June forecasts) and then bounce back to a relatively modest 2.7% growth in 2024. Asia is expected to be the main engine of growth in 2023 and 2024, whereas Europe, North America and South America are expected to see very low growth.

The energy price surge from the Ukraine invasion has been a key driver of both global inflation and economic uncertainty. The world has not seen an energy price shock to this degree since the 1970s. The OECD estimates that 17.7% of GDP across OECD economies in 2022 is attributable to energy end-use – only 0.1 percentage points below the 17.8% peak in 1981 (during the second oil crisis). Total energy cost has gone up as the surging price of energy has quickly offset the gains achieved over the past decade in greater energy efficiency.

Chart 1: Estimated share of GDP spent on energy end-use (% of OECD GDP)

Source: OECD.

This comes as commodity prices remain at elevated levels. The RBA’s latest commodity price data (released yesterday) saw small decreases in commodity prices over October and November after peaking in June. However, commodity prices remain well above historical levels.

These small declines contrast with conservative assumptions in the recent Federal Budget around commodity prices. Treasury estimated that commodity prices would ‘glide’ down, decreasing 86% for thermal coal spot prices and 40% for iron ore spot prices by the end of the March quarter of 2023. With minor movement over October and November, this heightens the potential for upside Budget surprise from commodity prices. 

Chart 2: RBA Index of Commodity Prices (SDR, 2020/21 average = 100)

Source: RBA. 

Persistently high commodity prices pose a significant risk to Europe and other major economies who are hit hardest by the energy shock. Inflation in Europe for example, is forecast by the OECD to be much more persistent than other developed economies, with growth in Europe expected to fall from 3.3% in 2022 to only 0.5% in 2023.  

However, OECD forecasts are more positive for other major economies. Economies in Asia are projected to experience less of a slowdown than other regions, and major Asian emerging-market economies are expected to account for close to three-quarters of global GDP growth in 2023.  

Further, Deloitte Access Economics does expect Australia will avoid a recession, though global risks are undoubtedly rising. Elevated commodity prices would see Australia continue to benefit as an exporter, providing a temporary but welcome boost to Australian exports, business profits and company tax receipts. Treasury estimates that if commodity prices remain elevated over the December quarter (as they have been) and glide down later, there would be a total increase in nominal GDP of $43.8 billion between FY23 and FY25. 

That scenario would provide a significant dividend to nominal GDP and the Federal Budget bottom line via commodity exports. The flipside would be an extended period of higher energy prices for Australian consumers and business energy users.