Energy crisis just one factor in slower growth

As much of the world suffers from a severe energy crisis, the economic effects will play out differently across regions, CIBC Asset Management’s chief investment officer says.

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“The impact on the global economy is relatively complex… as the structure of the global economy changes,” said Luc de la Durantaye. 

Take the U.S., for example. 

A rise in energy prices impacts consumers, as more spending will need to be allocated to energy relative to other goods, which detracts from growth, de la Durantaye said in an interview earlier this month. 

Because the U.S. is a large oil producer, though, the negative impact on consumption is partially offset by an increase in oil production, decreasing the economy’s sensitivity to higher oil prices. 

“Rising energy prices will hurt the U.S. consumer, especially as we approach U.S. Thanksgiving and Christmas,” said de la Durantaye, who manages the CIBC Multi-Asset Absolute Return Strategy. “But the impact is less than it used to be.”

China is also affected by the energy crunch. Following Covid-19, China experienced a surge in power demand.  

The country implemented decarbonization strategies that led to a rationing of energy consumption, which de la Durantaye attributed to a mix of supply and demand imbalances as China makes climate goals more binding. Local governments also implemented energy control targets, but there has been a shortfall in power generation due to surging fuel prices. 

“The renewable energy that they have is not capable of supplying the rising energy demand,” de la Durantaye said.  

These challenges, combined with the real estate deleveraging due to Evergrande Group, have resulted in analysts lowering their outlook for Chinese growth. 

In an updated outlook this week, the International Monetary Fund (IMF) forecast 8% growth for China this year — down slightly from the July forecast of 8.1% — and growth of 5.6% in 2022.

“We view a more pronounced growth deceleration in China than currently expected, due to maybe more spillover from the real estate sector in China and that spills over into Chinese consumption,” said de la Durantaye. 

However, he noted some countries are benefiting from rising oil prices, namely Canada, Russia and Norway, meaning the net global economic forecast is not necessarily being downgraded solely because of a rise in energy prices.

“Other factors are leading to a deceleration of global growth over the coming year,” said de la Durantaye. Most notably, the “torrid” growth experienced after the pandemic that can’t be sustained, as well as a large decline of fiscal stimulus in the U.S. 

On the whole, de la Durantaye said he predicts a deceleration in global growth, but growth will still be apparent moving into 2022.

The IMF’s updated outlook forecast global growth this year of 5.9%, compared with its projection in July of 6%. The downgrade was more severe for the U.S.: from 7% in July to 6% due to higher Covid cases, supply shortages and inflation.

However, risks remain. 

In addition to spillover from the real estate sector in China, de la Durantaye said Federal Reserve tapering or a hike in interest rates sooner than expected could have an impact on the outlook.

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