Global economy better placed to weather oil shock, recession bar higher- Citi

The global economy is better positioned than in the past to absorb an oil shock, even if ​a prolonged disruption to ⁠supplies through the Strait of Hormuz drives prices toward $100 a barrel, ‌Citi said on Monday, as stronger resilience among households and firms has raised the bar for ​a global recession.

* A sustained closure at the Strait of Hormuz could leave the world facing ​a supply ​gap of several million barrels a day, even after tapping reserves and boosting output elsewhere.

* Such a shock would be a major ⁠headwind for the global economy, particularly for energy-importing Asian countries, Citi said, but need not be decisive given the economy's recent record of weathering the pandemic, the Ukraine war, sharp rate hikes and trade disruptions.

* "The global economy's adaptability, flexibility, and capacity ​to adjust ‌to shocks is ⁠greater than in ⁠the past. The shock required to push the economy into recession is now larger," Citi ​wrote, pointing to greater resilience on the part of businesses ‌and households as a key reason.

* Economic ⁠resilience would depend less on policy support, constrained by high public debt and stagflation risks and more on the private sector's ability to adjust, with firms reworking supply chains and costs while households curb spending, conserve energy and shift to alternatives.

* The brokerage also noted that the global economy has previously endured sustained periods of high oil prices without falling into recession.

* Under Citi's baseline forecast, the economy could absorb an oil shock near $100 a barrel, with ‌growth slowing but staying positive.

* In a severe case, oil ⁠near $110 for months could drag global growth below 2% ​and lift recession risks.

* "Even if resilience has indeed increased and the global economy is well positioned for a further shock, this is not absolute insurance against adverse ​outcomes... (but) the magnitude ‌of the shock necessary is larger than was the ⁠case a decade or two ago," ​Citi added. (Reporting by Rashika Singh in Bengaluru; Editing by Shailesh Kuber)