Lane: Global energy shocks hit euro area growth, inflation
Philip R. Lane, Member of the Executive Board of the ECB, outlined analysis on energy supply shocks and their implications for monetary policy. He highlighted that global shocks have a more severe impact on euro area output and inflation than regional ones.
Oil price shocks: A drag on growth
ECB staff analysis, using a Bayesian vector autoregressive (VAR) model, quantifies the impact of supply-driven oil price increases on the euro area.
A geopolitical oil supply shock raising the real oil price by 10 percent 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 from geopolitical disruptions.
The model, estimated from 1985 to 2023, also indicates a steady decline in the euro area economy's oil intensity over this period.
Re-estimation over a shorter sample (from 2003) suggests a weakening of these effects, particularly a smaller response in private consumption, indicating some adaptation over time.
Global vs. regional: Compounding effects
A multi-country, multi-sector DSGE model compares global and regional energy shocks.
A global shock uniquely raises prices of all energy-intensive imported goods, leading to a more pronounced deterioration in terms of trade.
While real exchange rate depreciation offers some cushion, the adverse impact on EU output is larger due to reduced global demand.
Conversely, a regional shock allows domestic firms to switch to cheaper imports, mitigating output impact despite real exchange rate appreciation.
Global shocks create a compounding effect, affecting producers across the entire global value chain simultaneously, thus causing more severe damage to overall output and inflation.
Inflation's stubborn tail
The analysis highlights the complex and persistent nature of energy shock transmission, especially for global events.
Central banks must vigilantly monitor second-round effects on wages and inflation expectations, which can make inflation more broad-based and stubborn.
This implies a longer, more vigilant monetary policy stance, as indirect effects build up gradually and are amplified by global value chains.