China and OPEC put Spain on alert for the effects of oil at 100 dollars

The 100 dollars mark the threshold from which the price of a barrel of Brent oil, the reference crude in Europe, can have significant effects on the Spanish economy pushing growth down and inflation up. This scenario, which was not initially the one that the experts considered most plausible in a year in which a slowdown in the global economy is expected, is no longer ruled out. The reopening of the Chinese economy, the second largest oil demander globally after the United States, and the decision of the OPEC countries to cut production have put governments, organizations and central banks around the world on notice.

OPEC+, which brings together members of the cartel and other partners such as Russia or Mexico, announced last week a cut in daily production of 1.66 million barrels starting in May, which led to Brent crude to overcome the barrier of 85 dollars again. This reduction was added to the half million barrels that Russia will also withdraw from the market until the end of the year and to the two million barrels that the group has already stopped extracting since last October. This decision may have a “significant” impact on Spanish inflation depending on how it is carried out.

He Oil and fuels make up around 5% of the CPI indexalthough its indirect effects are very important because fuels are the backbone of practically the entire production system, explained to ‘La Información’ Raymond Torres, director of the situation of Funcas. The moderation in the price of gas and other raw materials has allowed the annual inflation rate to calm down in recent months. The so-called base effect would have appeased the general CPI to 3.3% in March, according to the data provided by the National Institute of Statistics, given that in the same month last year the price of electricity rose by 33. 1% year-on-year and transport 18.6%, pressured by gasoline and diesel.

However, this de-escalation of inflation is still “very slow, very uncertain,” says Torres. In fact, the Fundación de las Cajas de Ahorros has been warning about the possibility of sawtooth inflation between now and the end of the year and government sources have confirmed to this newspaper that they foresee a very volatile behavior of prices for what remains of exercise, although with half the rate that in 2022. If the price of oil increases as a consequence of the OPEC decision -new announcements of the cartel in the short or medium term are not ruled out- it would ruin the prospect of de-escalation of inflation and may provoke a reaction from the European Central Bank.

The issuer was expected to choose to announce moderate increases in the price of money in its next meetings, but if oil prices start to pick up “may question this dovish path and perhaps more steep rises could follow”, adds the also adviser to the European Commission on labor issues. Conversely, if the cost of ‘black gold’ does not rise excessively and the downward trend in inflation continues, “we could be witnessing the latest interest rate hikes” by some central banks that have declared data -dependent when it comes to putting their monetary policy into practice, says Mario Catalá, director of discretionary management at the firm Portocolom AV.

The impact of the Chinese reopening on oil and inflation

Another of the elements that would put upward pressure on the price of a barrel of crude oil -until it pushed it to around 100 dollars- would be for the Chinese recovery to gain intensity. In fact, the International Energy Agency (IEA) itself, which foresees a record in crude oil consumption this year, contemplates that the giant monopolizes almost half of the estimated increase in demand. In its latest quarterly report on the Spanish economy, the Bank of Spain itself referred to the double impact (positive or negative) that the Chinese reopening would have on prices. On the one hand, greater growth in the world’s second largest economy would boost global demand, especially for raw materials, which would tend to push inflation rates upwards.

On the other hand, the reopening of the Asian giant could accelerate the removal of bottlenecks in supply chains and strengthen the capacity of global supply to meet demand. This route would serve to partially reduce the current high inflationary pressures. Which of these channels will dominate “is very uncertain” and will depend, according to the regulator, on the very composition of the Chinese economic recovery. Axel Botte, global market strategist at manager Ostrum AM recalls that reports of economic activity in both Europe and China improved markedly in the services sector in March and eclipsed a slower recovery in the manufacturing sector.

So much so, that some of the country’s banks are working with a GDP growth forecast of 6% for this year, which would lead them to advance twice as much as last year. Consumption will be key to this, as it will be supported by improved income, confidence and mobility. Kevin Kang, KPMG’s chief economist for China, expects its economy to grow at 5.7% this year, once again becoming a key driver of global activity. In the consultancy they explain that the government of Xi Jinping has set itself the goal of creating some 1.2 billion new urban jobs this yearthe most ambitious goal in the country’s history, which would reduce the unemployment rate in cities to around 5.5%.

One of the keys is in youth employment, since in 2023 11 million students are expected to graduate in China, a record number. In addition, the Beijing Executive is giving priority to the recovery and expansion of domestic consumption. So far, New Year’s holiday spending has posted a strong recovery and households have excess savings of 10 trillion yuan accumulated in pandemic. “The reopening and economic recovery will contribute to improving consumer confidence and it is possible that part of the excess savings will be released, which should support the recovery of consumption,” they point out from the firm.

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