For all the suffering it has unleashed on humanity, one of the pandemic’s enduring trends has been the “excess savings” amassed by Canadians and citizens of other developed economies.
Canadian households had reportedly accumulated $184 billion in gross excess savings between the first quarter of 2020 to the first quarter of 2021, according to Capital Economics.
Similarly, Eurozone consumers were sitting on more than €780 billion, or US$902 billion, of excess savings at the end of the second quarter of 2021. Overall, Moody’s Analytics estimates consumers around the world had nearly US$5.4 trillion hoarded by the end of March, with U.S. consumers alone accounting for US$2.6 trillion.
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Frances Donald, global chief economist at Manulife Financial Corp., says while higher energy prices would translate into higher Canadian exports, it could crimp consumption.
“I would urge everyone to think about the concept of inflation not just as being prices going higher, but what it does to your day to day spending. If you have to spend more at the pump to fill your car to get to work or drive your kids to school, you will likely have less money to spend in other areas of the economy. Higher prices could push down general demand and growth,” Donald told the Financial Post’s Larysa Harapyn in a video interview last week.
Higher energy prices will make general households hesitant about economic outlook, Donald noted.
“You tend to see consumers get a little bit nervous when they are paying more to heat their houses and fill up those cars, lots of economist think of higher energy prices almost as a tax on general spending.”
The consumer price index rose 4.1 per cent in August compared to the same period last year, it’s fastest pace since March 2003. Gasoline prices surged 32.5 per cent in August, year-on-year — but the figure is skewed given the demand collapse at the height of the pandemic that decimated energy prices in mid-2020.
Brent crude prices hit US$84.60 per share this morning, near a three-year high, while benchmark AECO natural gas spot prices are trading at $5.94 million British thermal units, compared to a 365-day average of $3.16.
Europe, which is in the eye of the current global energy storm and suffering from double-digit percentage surges in power prices, would also face an economic slow down.
“The inflationary threat carries the most sting — surging energy prices will squeeze consumers in the winter and the inflationary pressures appear more broad-based and robust than initially expected,” according to Tomas Dvorak, an economist at Oxford Economics.
Amid the global energy crisis, international oil companies are eyeing a US$1 trillion windfall.
“At current Brent prices the upstream industry will generate a wall of cash,” WoodMac research director Kavita Jadhav said in a report. “We estimate the 42 largest IOCs (international oil companies) will generate a windfall of over US$1 trillion if prices keep tracking above a US$50/bbl industry planning price.”
While a significant portion of the energy windfall will likely be returned to shareholders in the form of dividends, buybacks and higher stock prices, it’s unclear that all of it will cycle back into the wider economy — or even lead to higher oil and gas production that could calm prices.
The economic impacts of energy prices are already being felt around the world. Power rationing in China and factory closures in Europe and the U.K. will weigh on global GDP growth and consumer and business sentiment, economists say.
“The winter heating season still hasn’t started, but this turn of events is already lifting inflation and adding downside risks to economic growth across Europe and Asia,” TD economist Omar Abdelrahman noted. “Case in point, China’s official manufacturing PMI slid into contractionary territory.”
Meanwhile, European policymakers in the most affected countries are already rushing to shield consumers, dampening the hit to growth at the cost of slightly larger deficits.
The slowdown in activity due to energy shortages will also further exacerbate the global supply chain issues that are affecting operations and lead to higher costs could cycling through consumers.
“Most of the increase in producer input costs has yet to flow through to consumer prices,” wrote Nathan Janzen, senior economist at Royal Bank of Canada. “The longer supply chain disruptions last and commodity prices remain elevated however, the more likely price pressures become more pervasive and pronounced.”
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