Citi Warns: Can Economy Survive Oil Above $100?

By Eleftheria Kourtali

The global economy faces serious risks due to the war in Iran and the closure of the Strait of Hormuz. However, according to Citigroup, various indicators of economic activity show resilience. PMI indices, “surprise” indicators, and stock market performance suggest that the economy is absorbing the oil shock with considerable smoothness. Growing demand for Artificial Intelligence is also contributing to this positive picture.

As a result, Citi is revising down its forecast for global growth, now estimating an increase of 2.6% for this year, down from 2.9% it predicted in February. The bank maintains a “wait and see” stance, but the data show resilience rather than a sharp slowdown.

At the same time, Citi estimates that inflation will rise to 3.5% this year, almost one percentage point higher than at the beginning of the conflict. The bank is closely monitoring secondary effects on underlying inflation, as businesses attempt to pass on increased costs to consumers. However, it predicts that the shock will be short-lived, with inflation declining to 2.7% next year.

As economic momentum remains steady, markets are increasingly concerned about the risk of higher inflation, pricing in less supportive policies. Markets expect interest rate increases from the Fed by the end of the year, three increases from the ECB, and two or three from the Bank of England.

Can growth remain resilient with oil prices above $100/barrel?

Although the global economy shows resilience, Citi believes that the outlook depends to a large extent on developments in the Middle East and, specifically, on the situation in the Strait of Hormuz.

Thus, it examines two main scenarios for oil prices.

In the more favorable scenario, if an agreement is reached to open the Strait within the next month, shipping will gradually resume. In this case, Citi estimates that the price of oil will fall to $80/barrel on average in the second half of the year.

Notably, this will be approximately $20/barrel higher than forecasts before the conflict. This significant revision reflects the potential loss of millions of barrels per day due to destruction of production and infrastructure.

In such a scenario, the global economy could experience a relatively smooth landing, with growth slightly lower than initial expectations and inflation slightly higher. Citi believes that the global economy could grow satisfactorily with oil at $80/barrel.

In the second scenario, if the Strait remains closed for much of the year, the price of Brent oil will average $120/barrel in the second half.

Under these conditions, the impact would be more severe. Global growth would fall below 2% and inflation would reach close to 5%.

In this scenario, the economy would be hit not only by higher oil prices, but also by the secondary effects of supply chain disruptions, with petrochemicals and fertilizers being particularly vulnerable.

Although the ultimate outcome would not be exactly a full stagflationary episode like in the 1970s, it would bear similar characteristics.

Citi notes that its current forecast is closer to the favorable scenario. It believes that if the conflict is resolved and oil prices fall below $100/barrel, the global economy will be able to recover. Growth this year will be slightly lower and inflation somewhat higher, but overall economic performance will remain strong.

“The question we continue to examine is whether similar performance could be achieved if oil prices remain above $100/barrel,” Citi states characteristically.

Its base case is that growth will decline significantly. However, the global economy has shown remarkable resilience since the beginning of the conflict and has coped with many challenges in recent years. In 2022, Russia-Ukraine. In 2023 and 2024, central bank rate hikes. And last year, Trump tariffs. In each case, growth remained near trend. “The global economy is now more adaptable and flexible than it was one or two decades ago,” Citi concludes.

More specifically, it identifies three factors that may enhance the resilience of the global economy against higher oil prices.

First, the intensity of GDP related to oil has declined significantly in recent years. Thus, increases in oil prices have a smaller impact on overall production costs.

Second, global reserves are significant and provide an important “cushion.” Despite concerns about the depletion of these reserves, the situation appears more favorable due to significant accumulation in the past year.

Third, oil prices up to $110/barrel are not unprecedented. From 2011 to the first half of 2014, prices fluctuated at similar levels and global growth remained stable. The factors that led to these high prices included supply pressures and strong demand, mainly from China and other emerging markets. Citi considers this period significant as a precedent as it examines future scenarios for the global economy.