The global economy is demonstrating significantly greater resilience to geopolitical and energy shocks than many expected. However, the risk has not disappeared. ΠA prolonged oil price hike could spark inflation again, force central banks to raise interest rates and put an end to the stock market rally.
This was stated by the chief economist of the Swiss bank UVS, Daniel Kalt, during a presentation dedicated to the state of the global economy, geopolitical risks and prospects for the financial markets in which Money.bg is present. It was part of the program of the SEE SWISS BUSINESS FORUM event.
"If oil reaches $150-$200 per barrel, the game is on", the economist predicted.
The baseline scenario of the SWISS remains relatively positive and does not predict an immediate global recession. According to Kalt, the global economy is currently gaining momentum, supported by the recovery of industrial orders, investments in energy and data centers, the emergence of artificial intelligence and growing defense spending.
Πetrol shock, which the world is currently struggling to bear
Kalt paid special attention to the tension in the Middle East and the disruption of supplies through the Caspian Sea. Before the conflict broke out, 35-40 tankers passed through it daily, carrying a total of about 20 million barrels of oil.
Despite the dramatic reduction in traffic, forecasts of a rapid rise in oil prices to $150-$200 per barrel and a subsequent global recession have not yet materialized.
One of the reasons is the release on the quantities of the strategic oil reserves of the US and China. American reserves have fallen to historic lows, but this has helped limit the initial price shock. Πo-an important structural reason is that the modern economy is significantly less dependent on oil compared to the 1970s.
Πo According to calculations presented by experts, about half a century ago the American economy emitted close to a kilogram of carbon emissions for the production of one dollar of value added. Today, the quantity is below 300 grams. ΠA similar improvement is also observed in China.
This means that each dollar of economic output now requires significantly less energy from fossil fuels, and the impact of the oil shock on growth and inflation is weaker.
Where does the real risk begin?
According to the UVS simulations, if the price of oil remains At around $120 per barrel for six months, U.S. inflation could rise to about 5%. A similar scenario would put the Federal Reserve in a very difficult position. Instead of lowering interest rates, the central bank may be forced to tighten monetary policy again.
"Then we will have a serious problem in the stock markets", the economist said.
The consequences could be particularly painful: more expensive oil increases inflation, higher inflation maintains or increases interest rates, and cheaper financing is putting pressure on company valuations and consumption. He warned that a fall in the US stock market of about 30% could curb the consumer boom in the US. This, in turn, would significantly increase the likelihood of an American recession and the spread of the crisis to the rest of the world.
For now, UVS continues to expect a gradual normalization of the energy market and the avoidance of a new increase in interest rates. In a more favorable scenario, next year could even open up the possibility of their decline.
Why do stock markets continue to rise despite the wars?
The strong performance of stock markets is not solely due to optimism about the experienced intellect. This is also supported by real growth in corporate profits.
Πo the smoke of Kalt UVS started the year with an expectation of about 10% increase in corporate profits. As a result, the forecast was raised first to 20%, and then to 25%.
The economist also revealed the representation of the capital markets in Central and Eastern Europe. If Russia is excluded from the comparison, regional markets have achieved results close to those of the American market, especially in recent months.
Eastern Europe continues to grow faster than the western part of the continent thanks to the process of economic convergence, and he expects this trend to continue. However, the region is paying a higher price following the energy shock and the war in Ukraine, with the resulting decline reaching approximately 20-25%. ΠThe positive signal is that inflation is already showing signs of slowing down.
Defense is becoming the engine of the European economy
The escalation of military conflicts is changing not only politics but also the structure of the European economy. According to the presented data, the countries closest to Russia are increasing their defense spending the fastest. The Baltic countries are already on track to reach around 5-6% of GDP, with Poland, Finland and Sweden following suit.
Germany is also increasing spending, while the response in other major Western European economies has been weaker. Switzerland lags far behind in these areas and is encountering difficulties even in attempts to increase its military budget from around 0.8% to 0.9% of GDP.
At the same time, new orders for the defense industry are already stimulating production. ΠKalt's observations show that defense is becoming one of the main drivers of recovery at a number of European, including Swiss, industrial companies.
AI boom could last another two to three years, but not without risk
Kalt expects the investment boom around artificial intelligence to last another two or three years. However, he cautions that different parts of the AI industry should not be viewed as equally secure.
UVS divides the market into three tiers: infrastructure, including chips and data centers; basic AI models; and real-world business applications of the technology.
The greatest risk is concentrated in infrastructure. If a new model emerges that uses much less energy and computing power, some of the data centers currently being built could quickly become redundant. This could cause a sharp drop in investment and problems for companies financing these projects.
The long-term potential, however, lies in the application of AI in all sectors of the economy. It is here that Kalt expects significant improvements in productivity, new business models and the greatest economic impact over the next 5-10 years. Even a possible surge in infrastructure investment will not stop this transformation.
UVS stands aside from US government bonds
In response to the question of whether the current situation creates an opportunity for UVS to increase purchases of US government bonds, Kalt was categorical that the moment is not right. The bank has significantly reduced both investment banking and trading activity in US government bonds. ΠPri current risks UVS does not plan to increase its exposure to them excessively.
ΠPri future market volatility and reaching strongly undervalued levels may present an opportunity for purchases, but according to Kalt, it has not yet occurred. The basic message of the UBS remains cautiously optimistic. The global economy is currently managing to absorb geopolitical shocks, and corporate profits and investments are supporting growth. The line between sustainability and crisis, however, may be marked by the price of a barrel of oil.