Key insights
- Morgan Stanley reports global fiscal responses to energy shocks are constrained by high debt and rising rates. Limited intervention in developed markets, including the US, implies faster inflation pass-through from rising oil prices. Asia is absorbing more of the price increase via subsidies. Europe faces fiscal restraint. This suggests potential inflationary pressures in the US, negatively impacting equity valuations.
Investing.com -- As global energy markets navigate a fresh wave of supply disruptions, the fiscal "safety net" that cushioned consumers during the 2022-23 crisis is notably thinner.
A new briefing from Morgan Stanley reveals that while governments have historically relied on fiscal policy to soften the blow of oil price volatility, a combination of elevated debt-to-GDP ratios and rising borrowing costs has significantly raised the bar for new interventions.
Governments currently face a stark policy choice: pass energy price hikes through to household balance sheets or absorb the shock on the public ledger.
In 2023, direct and indirect energy subsidies reached an estimated 1.5% to 2.0% of global GDP, driven largely by aggressive price suppression in the Euro area. However, analysts note that the "fiscal space" available today is far narrower than during the previous shock.
"The scope for large-scale fiscal expansion is constrained," Morgan Stanley economists state, pointing out that governments are now more likely to rely on "within-envelope" adjustments, such as reallocating existing spending or small tax offsets, rather than launching new, deficit-financed support packages.
In developed markets (DMs), where market-based pricing is the norm, this lack of intervention is expected to lead to quicker and higher inflationary pass-through compared to emerging markets (EMs).
The report highlights a growing divergence in how different regions are handling current price pressures.
Asia is currently taking the lead in cushioning the impact; while international oil prices in local currency terms rose 53% over the past month, domestic fuel prices in the region rose by only 16% as fiscal measures absorbed 30% to 50% of the initial increase.
In contrast, Europe remains in a phase of "fiscal restraint." Reinstated EU fiscal rules and higher sovereign borrowing costs mean that a broad-based response comparable to 2022 would likely only materialize in a true recessionary scenario.
For energy-importing emerging markets, higher oil prices are creating a "classic twin-deficit problem," worsening both current accounts and fiscal balances. Analysts warn that while these markets can smooth price volatility in the short term, they must eventually draw a line on how much support is viable as fiscal capacity binds.