The global economy took another hit on Wednesday after U.S data revealed that inflation rose to 9.1% in the world’s largest economy in the month of June.
The increase in U.S. Consumer Price Index, which measures the inflation rate in an economy, pointed to an additional interest rate increase if the Federal Reserve would at least slow down the pace of increase and ease the extent of the widely projected recession.
The over 40-year high inflation rate plunged global financial assets and bolstered the U.S. Dollar gain to more than a two-decade high. This, I expect to further drag on oversea orders and the manufacturing sector in general as U.S goods become more expensive to foreign currency holders.
Brent crude oil, the international benchmark for Nigerian oil, has declined by $11.91 from $106.37 a barrel it traded on Tuesday to $94.46 on Thursday before paring losses to $96.27 as of 4:30 pm Nigerian time.
Oil traders and investors have started factoring in slow down in demand due to stronger U.S. Dollar, rising number of COVID-19 victims in China and higher borrowing cost (interest rate increase) expected to hurt new investments in the energy sector.
“Clearly, focus is now on the demand side of the oil equation. Yesterday’s weekly EIA (U.S. Energy Information Administration) report showed sizeable builds in product inventories,” Tamas Varga, analyst at PVM Oil Associates, said.
“Collateral damage of growing fears of inflation is the strong dollar, which is also bearish for oil prices. Interestingly, physical markets are still strong but the change in sentiment of financial investors is currently the dominant driving force.”
Oil dependent economies like Nigeria, Angola, etc will experience drop in revenue while Nigeria, Africa’s largest producer of the commodity, will also struggle with fiscal space as projected by the World Bank.
“When we launched our previous Nigeria Development Update in November 2021, we estimated that Nigeria could stand to lose more than 3 trillion Naira in revenues in 2022 because the proceeds from crude oil sales, instead of going to the federation account, would be used to cover the rising cost of gasoline subsidies that mostly benefit the rich. Sadly, that projection turned out to be optimistic,” stated Shubham Chaudhuri, World Bank Country Director for Nigeria.
However, with crude oil now trading at a three month low, Nigeria’s foreign revenue generation will drop and drag along infrastructure development.
“Due to the petrol subsidy and low oil production, Nigeria faces a potential fiscal timebomb,” the World Bank declared.
The U.S. Federal Reserve is expected to raise interest rates by anothe 100 basis points later this month to rein in inflation rate. The next meeting is schedule to hold on July 26-27.