Gas price hike: just another headwind for the global economy

Rising gas prices, which are driving up heating bills for the winter, affecting consumption and exacerbating a short-term surge in inflation, are another blow to the global economy, which is just bouncing back after the coronavirus shock.

The chaos in the gas market, which has driven prices up 280% in Europe this year and over 100% in the United States, is attributed to a number of factors, from low inventory levels to carbon prices towards reduced Russian deliveries.

The tensions are so great that several MEPs have called for an investigation into what they believe could be market manipulation by Russian Gazprom (MCX: GAZP).

Whatever the causes, the surge has a significant impact on the market:

1 / GROWTH

Analysts say it's too early to downgrade forecasts for economic growth, but a slowdown in economic activity seems inevitable.

Morgan Stanley (NYSE: MS) believes the impact will be small in the United States, the world's largest economy. Over a third of US energy consumption in 2020 was met by natural gas, with consumers mostly coming from industry, it says.

Overall, however, the higher gas prices increase the risk of stagflation - high inflation, low growth.

"It is clear that unease about the economic outlook is growing as a growing number of companies consider the prospect of rising costs," said Michael Hewson, senior market analyst for CMC Markets.

2 / INFLATION

Wholesale electricity prices in the Eurozone are at a record high, which could exacerbate inflationary pressures caused by COVID-related supply bottlenecks. In Germany, 310,000 households have to reckon with an 11.5% increase in gas bills, as data from Monday show.

Citi analysts, who pointed out that German factory outlet prices were already their highest since 1974, predicted a 5% increase in electricity and gas prices in January, which would increase consumer inflation by 0.25 percentage points next year.

Higher food costs are another side effect given a lack of carbon dioxide used in slaughterhouses and to extend the shelf life of food. Cuts in fertilizer production could also drive up food prices.

Goldman Sachs (NYSE: GS) anticipates higher oil demand and sees an upside risk of $ 5 a barrel on its Brent price forecast of $ 80 a barrel in the fourth quarter of 2021. Brent is currently trading at around $ 74. [O / R]

3 / CENTRAL BANKS

Central banks maintain their view that the rise in inflation is only temporary. Isabel Schnabel, a member of the European Central Bank's board of directors, said Monday she was satisfied with the rise in inflation across the board.

But as market and consumer inflation expectations rise, central banks will also keep an eye on gas prices.

"When we have higher inflation, whether temporary or structural, and slower growth, it will be very difficult for markets and central banks to assess, manage and communicate the situation," said Piet Haines Christiansen, chief strategist at Danske Bank .

This week's central bank meetings could test the determination of policy makers. The Bank of England meeting on Thursday is particularly in focus as inflation in the UK has just hit a nine-year high.

With UK producer prices skyrocketing, transportation costs showing little sign of cooling, commodity prices rising and job vacancies rising to over 1 million, the likelihood that higher prices will last longer, says Susannah Streeter, Senior Analyst at Hargreaves Lansdown (LON: HRGV).

"If this is the case, more members of the BoE could decide to vote in favor of a rate hike earlier than expected next year. However, this would be an unpopular measure as the impending tax hikes are already difficult to digest for many consumers," she said.

4 / STATE RESCUE PACKAGES

The UK is considering granting government loans to energy companies after major utilities sought assistance to help cover the cost of taking over customers from companies that have gone bankrupt under the impact of gas prices. One company, Bulb, has reportedly requested a bailout.

France, meanwhile, plans to make one-off payments of € 100 ($ 118) to millions of households to help them with energy bills.

"The story that is emerging in the UK energy sector will soon be more important than Evergrande for the European market," said Althea Spinozzi, Senior Fixed Income Strategist at Saxo Bank.

And she added that in a week of central bank meetings, the markets were "rightly concerned".

5 / COMPANY

Spain shocked the utility sector last week by diverting billions of dollars in profits from energy companies to consumers and capping the rise in gas prices. The loss of profits at Iberdrola (OTC: IBDRY) and Endesa was estimated by RBC at a billion euros and the shares of the companies were sold heavily.

According to Morgan Stanley, investors have been upset about contagion in other countries since taking the move. The bank considers these fears to be exaggerated, but admitted that there is a risk of margins tightening among European utilities in the coming months.