S&P Global Chief Economist: Long-term Oil Supply Shocks Could Trigger a Global Recession

How does supply shock from AI evolve into a global market crisis?

Southern Finance, 21st Century Business Herald Reporter Zhou Rui, New York Report

Influenced by U.S. President Trump’s speech, market concerns over Middle East military conflicts have intensified, with international crude oil futures prices soaring sharply on April 2. By the close of trading on April 2, May delivery light crude oil futures on the New York Mercantile Exchange rose by 11.41%, to $111.54 per barrel; June delivery Brent crude oil futures in London increased by 7.78%, to $109.03 per barrel; spot Brent crude oil prices touched $141.37 per barrel, the highest level since 2008.

Against the backdrop of ongoing escalation in Middle East tensions and near-total blockade of the Strait of Hormuz, international oil prices have surged sharply since March, and global financial markets have experienced significant volatility: the U.S. S&P 500 index fell 5.09% in that month, the Nasdaq declined 4.75%; Japan’s Nikkei 225 recorded its worst monthly performance since 2008.

Market structure is also changing. Analysts point out that recent stock market movements and oil prices are increasingly correlated, with the “oil price-driven market” becoming more evident. Once energy supply remains constrained, high oil prices will through multiple channels—corporate costs, consumer spending, and inflation expectations—deeper drag on the global economy.

In this context, markets are reassessing the nature of the current shock: is this energy supply disruption-driven shock a short-term disturbance, or could it evolve into a broader macroeconomic turning point? How will the Federal Reserve balance policy options amid rising inflation pressures and growing growth uncertainties? Is the global economy shifting from “recovery” toward “rebalancing” or even “slowing down”?

Focusing on these key issues, Southern Finance interviewed Paul Gruenwald, Chief Economist at S&P Global. He clearly defines the current situation as a typical “supply shock” and systematically analyzes its differentiated impacts on various economies, constraints on monetary policy pace, and potential phased risks facing the global economy.

Market Volatility Intensifies, “Oil Price-Driven” Features Highlighted

Southern Finance: The current economic situation is very complex. Increasingly, markets believe the U.S. is experiencing stagflation, right? What is S&P’s baseline scenario?

Paul Gruenwald: We just released the latest scenario analysis, so that’s the most recent judgment. It’s a supply shock. A supply shock refers to declining output and rising inflation. So I’m not sure it can be simply defined as stagflation, but our forecast is that U.S. inflation will rise significantly this year, possibly reaching 4%. The impact on output depends on the type of country: for energy-producing nations, the effect may not be too severe; for energy-importing countries lacking inventories or reserves, the risks are greatest. Currently, it remains a supply shock mainly concentrated in the Asia-Pacific region and large energy-importing countries.

Changes in U.S. Labor Market Structure: Employment “Stable” but Foundations Narrowing

Southern Finance: With the recent ADP employment data released, how do you view the U.S. labor market?

Paul Gruenwald: The U.S. labor market has undergone significant changes. Currently, our estimate is that to keep the unemployment rate stable, the U.S. needs to add about 30k jobs per month. Previously, this number was around 150k. This decline is mainly because immigration has decreased, and there are fewer foreign students and other labor entering the U.S. Therefore, the number of new jobs needed to stabilize employment has significantly shrunk. However, the only sector currently driving employment growth is healthcare. Technology, government, manufacturing, and education are all declining or flat. Overall, employment looks decent, with unemployment around 4.3% to 4.4%. But the foundation for job growth is very narrow, which is itself a risk factor.

Southern Finance: The market believes the current situation is one of “no hiring and no layoffs.” Do you agree?

Paul Gruenwald: Yes. Usually, the labor market has what we call “liquidity,” meaning employees leave jobs and companies hire new ones. Post-pandemic, this liquidity was very high but has now contracted significantly. Companies are hiring less, and employee turnover is decreasing; overall, labor mobility has almost shrunk. This means the foundation for economic growth is further narrowing, currently well below trend or normal levels.

Rising Macroeconomic Uncertainty, Markets Reassess Policy Paths

Southern Finance: The Fed considers both inflation and employment in policy decisions, and Powell’s term ends in May with a new chair to be appointed. Do you think the Fed’s policy trajectory will change?

Paul Gruenwald: The Fed makes decisions through a committee of 12 voting members. The Chair has significant influence, but we need to observe Kevin Warsh’s performance, though he inherits a Fed still highly focused on inflation. Currently, the Fed is on a rate-cutting path but is not eager to cut rates. The U.S. economy is generally doing well, and if it remains steady with inflation still above target, even room for rate cuts will lead to a slow pace. Additionally, the uncertainty from Middle East conflicts makes not only the Fed but global central banks cautious. With ongoing upward pressure on inflation from oil prices and other factors, no central bank will easily pursue aggressive rate cuts.

Southern Finance: Do you still expect rate cuts this year? If so, what magnitude?

Paul Gruenwald: Our baseline scenario now is only one rate cut this year. Previously, we expected two cuts in the second half. We already thought the Fed would hold steady in the first half, and that view has become even more pronounced. We maintain the expectation of one cut, assuming the Middle East conflict eases quickly, stabilizes, and inflation begins to decline. If the shock lasts longer and impacts more severely, rate cuts this year are unlikely.

Transmission of Energy Shock: From Supply Disruption to Global Market Risks

Southern Finance: Given the still high risks in Middle East tensions, have you incorporated scenarios like oil price shocks into your models?

Paul Gruenwald: Yes. Inside S&P Global, our energy team closely tracks developments and has built a three-stage model. The first stage is the “flow stage,” after the Strait of Hormuz closure, where oil and gas still in transit are delivered. This stage has ended as ships have reached their destinations.

Now we are in the second stage—supply shock. If you are an oil or gas producer, this is beneficial; if not, you rely on inventories or face current very expensive spot markets. We estimate about 15% of oil supply and 20% of natural gas supply have been lost, pushing prices higher. Demand will be forced to decline to match supply unless supply recovers. We are currently in this stage.

The third and most severe stage involves evolving into a global market crisis. If this persists, demand will be sharply compressed, leading to downward revisions of growth, profit, and spending expectations, followed by market sell-offs, risk aversion, and capital flows into dollars. Consumers will cut spending, companies reduce investment, potentially causing a slowdown or recession. We have not yet entered this stage, but the next risk is shifting from physical supply shocks to financial market shocks.

Southern Finance: The global economy experienced energy or crisis shocks in 2008, 2020, and 2022. What is different this time?

Paul Gruenwald: These situations differ. 2008 was a U.S.-centered global financial crisis, 2020 was a pandemic, and this time is a supply shock. The Strait of Hormuz has never truly closed before; it’s a very rare event. Although it has been discussed many times, actual closure is seldom seen. Today, global dependence on energy is lower than in the 1970s, economies are more diversified, productivity is higher, and the U.S. is in a better position—back then, the U.S. was a major energy importer. We need to reassess the global energy landscape: which countries produce energy, which depend on imports, and which hold inventories. In Asia, China, Japan, and South Korea are relatively better off because they have strategic reserves that can support months, providing a buffer despite limited but finite reserves.

Southern Finance: Your team released a “Severe Downturn Scenario” this week. What are the specific triggers for this scenario?

Paul Gruenwald: That’s a market-level scenario. If regional supply shocks evolve into a global market shock, we enter this phase. But that depends on market judgment—that recovery won’t be quick, and the impact will be global, possibly with longer Strait closures. Currently, there are disagreements among technical and financial experts: technicians believe supply recovery will take longer, involving restoring production, repositioning ships, and transporting energy—this isn’t like flipping a switch. It’s a complex supply chain process. Iraq and Kuwait have paused some production, which needs to gradually resume before oil can be shipped. This is a physical process, not just a financial one.

Southern Finance: Besides these well-known risks, are there tail risks you think markets are currently underestimating?

Paul Gruenwald: I believe the worst-case scenario is what we just described, with uncertain severity. But by 2026, some positive factors remain, such as ongoing investments in AI and data centers, which are not only U.S. stories but also opportunities for exports from Thailand, Vietnam, Mexico, and parts of India. Financial conditions remain relatively loose; although U.S. Treasury yields have risen and spreads widened, they are still below historical averages. The only positive factor that has disappeared is low energy prices—now energy prices have risen, and supply shocks are present. The interaction of these factors will significantly influence the coming quarters.

Southern Finance: Is the high debt level in the U.S. still a risk to watch?

Paul Gruenwald: Yes. The energy crisis doesn’t necessarily translate directly into higher end prices because governments can buffer through subsidies, or require energy companies to cut profits or pass costs to consumers—similar to tariff mechanisms. If governments choose to subsidize, debt increases; if not, costs are passed on, fueling inflation—something nobody wants.

Southern Finance: Specifically regarding China, how does S&P view China’s growth path this year?

Paul Gruenwald: We expect about 4.5% growth for China this year. Structural issues remain, such as excessive real estate investment, but China’s exports in clean energy, batteries, electric vehicles, and photovoltaics are performing well. Although China is not an energy producer, it holds substantial inventories, providing some buffer. Energy security will become more important, and countries will focus more on energy self-sufficiency.

Southern Finance: What is S&P’s overall outlook for the global economy?

Paul Gruenwald: Overall, global economic growth is expected to remain around 3.25% in the long term. The main factors influencing global growth are the U.S., EU, and China, each accounting for about 20%, together nearly two-thirds. If China maintains around 4.5% growth and the U.S. and Europe remain stable, global growth won’t change much. But if a market shock occurs, global growth will decline.

Planner: Zhao Haijian

Reporter: Zhou Rui

Editor: He Jia

Editing: Intern Duan Yihang

Production: Zheng Quanyi

Design: Zheng Jiaqi