Is another US recession in sight after the oil price shock from the Russia-Ukraine war?

In the past 50 years, every time oil prices, adjusted for inflation, rose 50% above trend, a recession followed

Few economists say the US is in danger of recession since the economy is underpinned by a strong labour market and solid consumer spending. Bloomberg

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Historically, a surge in crude oil prices of this magnitude have ended US economic expansions and tipped America's economy into recession, according to Pictet Asset Management.

In the past 50 years, every time oil prices, adjusted for inflation, rose 50 per cent above trend, a recession followed, data from Luca Paolini, chief strategist at Pictet, shows.

Brent, the international gauge for oil prices, climbed well above $110 a barrel this week, crossing that threshold on worries about disruption to Russia’s exports after it invaded Ukraine.

Brent has rallied around 50 per cent this year to top $118, trading around decade highs. Futures in New York rose by more than $24 this week alone, the highest weekly dollar increase on record.

Fear is already playing out in the stock market as the war rekindled inflation concerns and clouded the outlook for corporate profits.

The S&P 500 Energy Sector has been one of the few bright spots, continuing its reign as the top performing group in the index, up 35 per cent in 2022.

Oil and gas companies like Exxon Mobil, Chevron and ConocoPhillips have posted double-digit gains this year, benefiting from a rise in oil prices.

But investors question how long the strength in energy stocks will last, as the group is now the third-most shorted industry on the S&P 500, with short sellers betting that the oil boom will soon be over.

“I don’t expect an economic disaster, but what we’re seeing in oil prices will have a significant impact on growth,” Mr Paolini said.

To be sure, oil price shocks have ended economic expansions like those in the mid-1970s, early 1980s and early 1990s. But other downturns were not directly caused by a sharp rise in oil prices, like the 2001 recession and the global financial crisis.

I don’t expect an economic disaster, but what we’re seeing in oil prices will have a significant impact on growth

Luca Paolini,
chief strategist at Pictet Asset Management

Few economists say the US is in danger of recession since the economy is underpinned by a strong labour market, solid consumer spending and better-than-expected corporate profits.

But many expect growth to slow further if inflation continues to rise. The war in Ukraine has injected further volatility into markets just as the Federal Reserve enters a rate rise cycle.

“The best thing for markets is for the Fed to lift rates gently and adjust policy in case the war in Ukraine evolves in the wrong way,” Mr Paolini said.

“Waiting to raise rates would be the wrong thing to do because the economy could suffer significantly if inflation rises even further.”