Sustained high oil prices of $70/bbl to hit global economy: Fitch

Dubai (Platts)--26Sep2005

The apparent resilience of global economic growth in the face of high oil
prices may prove short-lived as world economic growth forecasts could fall by
1% in 2006, Fitch Ratings said Monday in a report.   
     GDP growth in the G7 in 2004 and the first half of 2005 has been
buttressed by earlier macroeconomic policy easing but this impulse is now
turning negative, just as the drag from oil prices gains traction, Fitch said.
     "If oil prices were to remain at $70/bbl for a sustained period, world
GDP growth in 2006 could fall by around 1% compared to previous forecasts,"
the report said. 
     Fitch said it examined a scenario in which oil prices remain at $70/bbl
until end-2006 and concluded that the soft landing widely predicted for the
global economy after last year's above-trend expansion would be under threat. 
     "At $70/bbl, the oil price shock would be on a scale equivalent, in real 
terms, to those seen in 1974 and 1979," Fitch said in its report. 
     "While there are good reasons why the impact of an oil shock would be
less severe than in the 1970s, including reduced oil intensity, enhanced
macroeconomic policy credibility and greater proclivity to spend among oil
exporters, it would nonetheless represent a sizeable income loss for the G7
economies, which spent nearly 2% of GDP on oil consumption in 2004," the
report added 
     Sustained high oil prices could also exacerbate risks associated with
global imbalances. A higher oil import bill could see the US current account
deficit reach $1-tril in 2006, 7.5% of GDP, amplifying concerns about its
sustainability and the risk of increased volatility in global currencies and
other asset markets, Fitch said. 
     While emerging markets are net oil exporters in aggregate and hence would
benefit from an improvement in their terms of trade, sustained oil price
strength would likely see growth slow, reflecting emerging markets' more 
intensive use of oil and their reliance on external demand, Fitch said. 
     "Central banks in emerging market net oil importing countries would be
faced with the unenviable task of having to raise interest rates sharply in an
environment of slowing economic growth in order to maintain monetary and
exchange rate stability," senior director in Fitch's Sovereign Group Brian
Coulton said in the report. 
     From a balance of payments perspective the largest negative impact would
be felt in Asia--where some countries would see trade accounts deteriorate by
3% of GDP--but, on the whole, external finances in the region are robust. 
     However, a number of net oil importers in emerging Europe already running
large current account deficits will also see a significant widening in trade 
imbalances. Notwithstanding recent efforts in a number of countries to limit 
the increase in subsidy expenditures, the temptation for governments to absorb
the cost of higher oil prices through fuel price subsidies would remain
strong, hampering fiscal progress, Fitch said.

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