Lane: Global energy shocks worsen output, inflation impact
Philip R. Lane, Member of the Executive Board of the ECB, outlined analytical perspectives on energy supply shocks. He highlighted that global energy disruptions have a more severe impact on output and inflation compared to regional shocks.
Quantifying the oil price hit
ECB staff analysis, using a Bayesian vector autoregressive (VAR) model, quantifies the economic impact of supply-driven oil price increases on the euro area.
Unlike demand-driven rises, a supply shock, especially geopolitical, significantly weighs on oil-importing economies.
A 10 percent increase in the real oil price is estimated to lower euro area real GDP growth by 0.2 to 0.3 percentage points annually for three years.
Both private consumption and investment growth are adversely affected, with investment showing greater sensitivity due to elevated uncertainty.
The model, estimated from 1985 to 2023, also indicates a weakening of these effects over time, particularly for private consumption, consistent with the euro area's declining oil intensity.
This suggests a gradual adaptation of the economy to energy price fluctuations, though significant impacts persist.
Global shocks: A compounding effect
ECB staff compared global and regional energy shocks using a multi-country, multi-sector DSGE model.
A global shock raises imported energy prices directly and indirectly, increasing costs for all energy-intensive goods and deteriorating the EU's terms of trade.
The adverse impact on EU output is larger due to reduced global demand.
Unlike regional shocks, a global shock offers no relief via cheaper imports as costs rise worldwide, creating a compounding effect across international suppliers.
This leads to more severe damage to output and larger, more front-loaded indirect effects on non-energy inflation, contributing 1.5 percentage points cumulatively compared to 0.4 for a regional shock.
The hidden costs of global shocks
Lane's speech highlights the complex, compounding effects of global energy shocks on output and inflation, extending beyond direct price impacts.
This analysis offers crucial insights for policymakers, demanding differentiation between shock types when formulating responses.
Future global energy crises will likely necessitate a more nuanced and potentially forceful monetary policy reaction to manage broader inflationary pressures.