Recession risk could blunt impact of high oil price


THE threat of recession could mitigate the impact of high oil prices due to output cuts on Philippine inflation, according to local economists.

Oil-producing countries such as Saudi Arabia and Iraq announced that they will cut oil production by a total of 1 million barrels per day starting in May 2023 until the end of the year.

Saudi Arabia alone is expected to account for the reduction of 500,000 barrels a day during the period. Reports said this accounts for less than 5 percent of the country’s average production per day as of 2022.

“It will likely increase oil and commodity prices in the future, but I don’t think the worries over a global recession will subside soon so that oil and commodity price increases may not be sustained,” University of Asia and the Pacific (UA&P) economist Peter Lee U told the BusinessMirror on Monday.

Ateneo de Manila University Department of Economics Chairperson Alvin P. Ang agreed and said that in the short term, especially if the 6-percent increase in oil prices is sustained, this could feed into inflation.

However, Ang said actual demand is slowing. He added that countries like the United States still have “strategic reserves” that could cushion the impact on global pump prices.

Nonetheless, certain economists such as University of the Philippines Diliman School of Economics head of research Renato E. Reside Jr. believe there will be an impact on the country’s inflation rate and growth prospects.

“It’s going to feed further into current inflation and inflation expectations. It is a threat to both inflation and growth, not just in the second quarter. This may also affect the trajectory of future policy rate increases both in the US and here,” Reside said.

However, one good news is that Overseas Filipino Workers (OFWs) in the Middle East who are employed in “essential professions” could benefit from the increase in oil prices.

“The OFWs from oil rich countries will benefit. Other OFWs are in essential professions,” Reside said. “They are employed in countries that will become richer since they sell oil to the rest of the world.”

Ang is also confident that production cuts in the Middle East will not lead to reduced employment for Filipinos.

He said Middle Eastern countries saw high profits in the past two years—buffer enough to continue employing OFWs.

Meanwhile, deVere Group CEO Nigel Green expressed concern that the jump in oil prices could lead to greater monetary tightening or at least maintain high interest rates longer to keep inflation at bay but “hinder economic growth.”

Green said in a statement that when costs increase, investors should increasingly be looking at a company’s and a sector’s ability to maintain margin.

“The surprise oil output reduction poses a threat to the global economy.  However, as ever, where there is volatility, there is opportunity for investors who seek advice,” Green said.

Moody’s Analytics expects the country’s inflation print for March to be slower at 8.4 percent. The Philippine Statistics Authority (PSA) will announce the latest inflation numbers on Wednesday, April 5.

Moody’s said the March inflation data will be slower than the 8.6 percent posted in February. However, the forecast of Moody’s is still much higher than the 4 percent posted in March 2022.