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Economic and Financial Market Update: Three thoughts

05 September 2022

Summary:

Oil prices have declined from their peak reflecting a weakening global economy;
But supply constraints mean oil prices are likely to be structurally higher;
Businesses are currently a lot more confident than consumers and that dichotomy is influencing the composition of economic growth;
The main reason for the labour market shortage is that economic growth has bounced back substantially quicker than labour force growth.

As I like to say the economy never sleeps. There is always plenty going on in the world of economics. But in recent years the pace of big events seems to have increased, whether that be pandemics, wars or major weather events. Maybe there was not quite anything of that magnitude over the past week. But there was still a bit going on.

Oil prices are structurally higher

The substantial rise in oil prices since the peak of pessimism about the pandemic (April/May 2020) has had a substantial impact on the global economy and financial markets. At first that rise was seen as a sign of increasing confidence about the global economy. But the sharp upward shift in oil (and other commodity) prices this year has led to a spike in inflation and a slowing of global economic growth. Concern about high inflation has led to very aggressive central bank interest rate responses that in turn has led to even more worries about the economic growth outlook.

As a result the outlook for oil prices, always important, has become even more important. Worries about the outlook for the global economy has seen many commodity prices decline from their peak (gas is a clear exception). Given central banks determination to return inflation back to their target, further reductions in economic growth expectations and therefore commodity prices (including oil prices) in coming months are likely.