(Finance) – The recent rising energy prices results in one significant supply shock, which could therefore also have an impact on the potential output of the euro area economy and affect GDP growth. This is what emerges from a study signed by three ECB economists – Julien Le Roux, Bela Szörfi and Marco Weibler – who anticipates the monthly bulletin to be released next Thursday.
Based on the assumptions used in the macroeconomic projections of the Eurosystem staff of June 2022 – explain the experts – i oil prices in US dollars in the period from 2022 to 2024 they should be about 40% higher than the levels of the pre-COVID period (2017-2019). Economists also note that the nature of the current rise in oil prices – a supply shock linked to supply bottlenecks and the war in Ukraine – is more comparable to the shocks of the 1970s than those of the 2000s, when the demand for oil has played an important role in rising fossil fuel prices.
Since, based on the macroeconomic model developed by Eurotower technicians, a 1% increase in oil prices results in a drop in potential output equal to about -0.02% in the medium term, it follows that the current 40% increase in the price of oil would result in a potential loss of output of the Euro Area in the medium term estimated around one -0.8% after four years.
For the ECB, however, it is one somewhat limited shock – economists note – which must be seen in the context of the cumulative increase in potential production, estimated by the European Commission at around 5.2% for the next four years.
This analysis – it is specified – is conditioned by one considerable uncertaintyin particular in relation to the persistence of the shock and political responses. On the one hand, the magnitude of the shock is based on futures prices which are very volatile and, therefore, the estimates for the magnitude of the potential production loss could change significantly, on the other hand, the analysis it does not consider the monetary policy response to inflationary pressure exerted by an increase in the price of oil, which can partially mitigate its persistence and reduce the medium-term effect on potential production, stabilizing the macroeconomic cycle and firmly anchoring inflation expectations.