Gas price surge is a headwind for world economy

Soaring gas prices that threaten to push up winter fuel bills, hurt consumption and exacerbate a near-term spike in inflation are another blow to a world economy just getting back on its feet after the coronavirus shock.

The gas market chaos, which has driven prices 280 per cent higher in Europe this year and led to a 100%-plus surge in the United States, is being blamed on a range of factors from low storage levels to carbon prices to reduced Russian supplies.

So high are tensions that several European Parliament lawmakers have demanded an investigation into what they said could be market manipulation by Russia’s Gazprom.  Whatever the causes, the surge carries major market implications:

Growth

Analysts say it’s too early to downgrade economic growth forecasts but a hit to economic activity looks inevitable.

Morgan Stanley reckons the impact in the United States, the world’s biggest economy, should be small. While over a third of U.S. energy consumption in 2020 was supplied by natural gas, users were predominantly industrial, it notes.

Overall though, higher gas prices raise the risk of stagflation - high inflation, low growth.

“It is quite clear there is a growing sense of unease about the economic outlook as a growing number of companies look ahead to the prospect of rising costs,” said Michael Hewson, chief market analyst at CMC Markets.

Inflation

Euro zone wholesale power prices are at record highs, potentially exacerbating inflation pressures inflicted by COVID-related supply bottlenecks. In Germany, 310,000 households face an 11.5% increase in gas bills, data showed on Monday.  

Noting German factory gate prices were already the highest since 1974, Citi analysts predicted 5% hikes for electricity and gas prices in January, adding 0.25 percentage points to consumer inflation next year.

Higher food costs are another side effect, given a shortage of carbon dioxide which is used in slaughterhouses and to prolong the shelf-life of food. Cuts in fertiliser production could also lift food prices.

Goldman Sachs predicts higher oil demand, with a $5 per barrel upside risk to its fourth-quarter 2021 Brent price forecast of $80 a barrel. Brent is trading at about $74 currently .