While many markets have stabilized since the plunge that started in early May, the economic uncertainty and fundamental risks remain, according to an analysis in late July by Citigroup’s chief economist Lewis Alexander.
In addition to the risk of higher rates in an array of countries, the outbreak of conflict in the Middle East raises the risk of oil-supply disruptions, which could push prices higher, Alexander says. “A price spike would certainly be a drag on global growth, but it could also generate inflation pressures, especially with global capacity increasingly stretched, and would compel central banks to respond with further hikes,” he says.
Emerging economies outside of the Middle East will account for more than 40% of the increases in oil production over the next decade and 70% of the increase in oil consumption, Alexander says. Thus, the success of the emerging economies and the policies they pursue regarding both the production and consumption of energy are likely to have a critical impact on the evolution of energy prices, he adds.
“Of course, the ongoing success of the emerging economies is not inevitable,” Alexander notes. “On the contrary, economic volatility in emerging markets is one of the great economic perennials.”