Global energy markets are once again experiencing supply disruptions, but the fiscal buffer that helped protect households during the 2022-23 episode is materially reduced, according to a briefing from Morgan Stanley.
The note stresses that a familiar policy choice has returned: governments must decide whether to let energy price increases hit household finances or to shoulder the burden on public accounts. That choice is now made more difficult by higher public indebtedness and increased costs of borrowing.
In 2023, direct and indirect energy subsidies were estimated at roughly 1.5% to 2.0% of global GDP, with much of that support stemming from aggressive price suppression measures in the Euro area. Morgan Stanley economists caution that the fiscal space available to repeat such interventions is considerably narrower today.
Policy trade-offs and likely approaches
The briefing underlines a clear trade-off between limiting inflationary pass-through and preserving fiscal sustainability. As Morgan Stanley puts it, "The scope for large-scale fiscal expansion is constrained." Rather than launching fresh, deficit-financed support programs, governments are increasingly expected to pursue "within-envelope" measures - reallocating existing spending, implementing smaller tax offsets, or using other fiscally contained adjustments.
In markets where prices are set by market forces, principally developed economies, this reduced intervention is expected to translate into faster and larger inflationary pass-through than in many emerging markets, where policymakers may still apply selective cushioning.
Regional divergence
Responses are already diverging across regions. Asia has so far absorbed a sizable portion of recent international oil price increases. While international oil prices rose 53% over the past month in local-currency terms, domestic fuel prices in the region increased only 16% as fiscal measures offset roughly 30% to 50% of the initial rise.
By contrast, Europe is described as being in a stance of fiscal restraint. The combination of reinstated EU fiscal rules and higher sovereign borrowing costs means a broad-based, 2022-style policy response would likely be reserved for a severe recessionary scenario.
Energy-importing emerging markets are encountering what the briefing calls a "classic twin-deficit problem," where rising oil costs erode both current account positions and fiscal balances. Morgan Stanley warns that while these governments can smooth volatility temporarily, they will need to define limits to support as fiscal capacity tightens.
Market and economic implications
The briefing implies that the narrower fiscal safety net will influence inflation trajectories, public debt dynamics, and the speed with which price shocks pass through to consumers. Policymakers appear more constrained to act aggressively, which has implications for sectors sensitive to energy costs and interest rates.
Conclusion
Morgan Stanley's assessment portrays a world where policymakers face reduced latitude to mitigate energy-driven price shocks. With debt levels and borrowing costs elevated, governments are leaning toward fiscally contained adjustments rather than large-scale, deficit-funded support. The result is likely to be more heterogeneous regional outcomes and sharper trade-offs between inflation control and public debt management.