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Week Ahead: an 'unambiguous negative' for the global economy
Just as the economic clouds were lifting, a rising oil price poses a new threat to markets and the world economy.
Just how damaging will rising oil prices be for the struggling world economy and newly confident financial markets?
Described by Bank of America economists as an ‘unambiguous negative’ for the global economy, a sharply appreciating oil price could prove a counter-balance to other delicate signs of economic recovery and market optimism that have themselves in part helped the oil price rise higher.
Concerns over cuts to Iranian oil supplies helped Brent crude oil prices rise above $126 a barrel on Friday, in the fifth consecutive week of gains. Analysts said that the price would likely remain over $120 as tensions continued to fizzle.
The price rise led to a resurgence of old questions about the impact expensive crude has on economic growth. ‘Historically, oil shocks have tended to hit the energy-intensive newer industrial economies the hardest, the gas guzzling US a little less so and high-tax Europe the least,’ explained the Bank of America Merrill Lynch economists in a note.
However, with Europe particularly dependent on oil from the Middle East, 'the Arab Spring shock and the more recent oil price pressure could hit Europe unusually hard,’ they said.
Groans from the gas-guzzlers
In the US, rising gasoline prices pose a growing threat to the economic recovery, with president Barack Obama admitting to a concerned electorate on Thursday that there was no ‘silver bullet’ for higher prices. Gasoline price shocks have in the past been a drag on the US economy, and could keep a check on private consumption in the world’s biggest economy.
Philip Shaw, an economist for Investec, said that amid some ‘almost unambiguously good’ economic indicators in the US in recent weeks, ‘we are mindful of the downside risks to the economy posed by rising crude oil costs, and their knock-on effects on gasoline prices’.
US data to be published this week, including a consumer confidence indicator and manufacturing numbers, should provide more clues as to just how much damage oil prices are inflicting so far.
As well as the broader economic costs of high oil, there are also concerns about its direct impact on companies for investors. The bullish analysts at Goldman Sachs say the impact on equities should be ‘limited’. They explained in a research note: ‘Although commodity-consuming sectors are likely to suffer, the positive impact on commodity producers should counterbalance this.’
The man in charge of the world’s most powerful monetary policy setter, US Federal Reserve chairman Ben Bernanke, will be monitoring these conflicting forces. On Wednesday lawmakers will quiz him on the prospects of a third round of quantitative easing, or QE3. The more upbeat recent economic signs though make it likely that Bernanke will keep his bazooka in hand, as a deterrent to the doom-mongers, rather than actually using it.
In the UK the CBI’s distributive trades survey for February and the GfK/NOP consumer confidence indicator will provide more evidence as to whether the economy is in a double dip recession or whether the 0.2% contraction in the fourth quarter of 2011 – a figure that was confirmed on Friday – will be a one-off.
But once again, events in Europe’s crisis could shove the rest to the back pages of the Wall Street Journal. Two summits and the second round of the European Central Bank’s three year ‘LTRO’ lending scheme come loaded with potential to unnerve investors.
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