Economic output for the first quarter is expected to partially recover from the stall‑speed pace of Q4, but the threat of an energy shock is looming as the war in Iran continues.
The blowback from surging energy costs is only just beginning to affect the broader economy, suggesting that the impact on Q1 will be limited. The current nowcast for Q1 points to an annualized 2.3% increase, based on the median estimate from a set of nowcasts compiled by The Capital Spectator. If accurate, growth will regain some of the momentum lost in Q4, when the economy expanded by a sluggish 0.7%.
The Bureau of Economic Analysis is scheduled to release its initial Q1 estimate on April 30. With the war still raging, and no immediate end in sight, that leaves a long stretch for macro surprises between now and then. The basic calculus: the fallout from soaring oil prices is expected to create stronger headwinds for global economic activity the longer the conflict lasts.
The US economy remains exposed to oil shocks, but its role as a major energy producer gives it more resilience today than in previous decades, even though rising prices still strain consumers and raise inflation risk.
Europe and much of Asia, by comparison, are more exposed due to their reliance on imported oil from the Middle East. China, Japan, and South Korea are heavily dependent on imported fuel, for example. The US, by comparison, is the world’s leading energy producer and has become a net oil exporter in recent years.
To counter the macro blowback for the global economy, the International Energy Agency announced Wednesday that its 32 members will release 400 million barrels from emergency reserves—an unprecedented drawdown equal to about one‑third of the agency’s total strategic petroleum reserves. In another effort to ease prices, the US last week issued a temporary waiver allowing the purchase of sanctioned Russian oil and petroleum products.
The damage to US economic activity in Q1 will likely be relatively muted, or so current nowcasts suggest. But as the war enters its third week, the potential for slower growth and higher inflation is mounting for Q2.
“Underlying inflation pressures were already rising ahead of the war in the Middle East and are set to intensify,” said Diane Swonk, chief economist at KPMG.
Whether the expected Q1 recovery holds will depend on how long the world can outrun the energy shock now gathering force.
“Energy prices are back at the wheel,” advises Jeremie Peloso, a strategist at BCA Research. “The disruption level is global.”
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