Oil prices dulling global growth, according to economists

Rising oil prices are dulling the outlook for global growth, which is forecast at 4.2% a year in both 2011 and 2012 while world trade will rise by 7.8% this year and 5.7% in 2012.

According to the latest World Economy Forecasts from the National Institute of Economic and Social Research, Chinese GDP will grow by 9% in 2011 and 8.1% next year and Japanese GDP will expand by 2.1% this year and deflation will slacken from 1.5% in 2010 to 0.1%.

It also predicts that despite the sovereign debt crisis, Euro area GDP is expected to grow by 1.7% this year and 2% in 2012, while the American economy will grow by 2.6% in 2011 and 2.7%.

But overall the prospects for the world economy are less bright than before. ‘We now expect global GDP to expand by 4.2% in 2011 rather than the 4.5% we forecast in October. The surge in oil prices is the main reason. Between September and December 2010, oil prices rose by around $20 a barrel to $95 and the futures market suggests that this upward lurch will persist,’ the report says.

It points out that the rise in oil prices forms part of a general surge in the cost of commodities. Average food and other agricultural prices in 2011 will be over 25%, higher than in 2010 and metals prices over 30% higher. ‘This is pushing up inflation, which will rise in the OECD to 2.2% in 2011, from 1.7% in 2010 and a negligible 0.3% in 2009. Inflation will run at 3.5% in China this year, it predicts.

Euro Area GDP will rise by 1.7% in 2011, the same as last year, despite continuing angst about the simmering sovereign debt crisis. As before, Germany will drive the recovery, with GDP rising by 2.6% though its contribution will be less than in 2010 when national output rose by 3.6%.

The UK economy will grow by only 1.5% in 2011 and 1.8% in 2012 and consumer price inflation will be 3.8% but fall to 1.8% in 2012. Te sharp rise in oil prices will raise inflation by over 0.5% in 2011, according to the report.

Greece and Ireland, the two countries bailed out last year, have diverging prospects. The Greek economy will shrink by 1.9% in 2011, whereas Irish GDP will expand by 1.7% this year. Output in Portugal, widely suspected to be the next in line for a rescue, is expected to decline by 0.8% this year.

A swift resolution of the debt crisis would bring great relief to these three beleaguered economies by lowering interest payments, it adds. ‘If bond spreads were immediately to revert to historical norms, rather than in 2015 and beyond as we assume in our forecast, the Greek budget deficit would improve by 10% of GDP by 2014 relative to our current forecast. We estimate the cost to the Greek taxpayer of the loss of confidence in Greek government debt to be about 10 cents on the euro,’ it says.

The American economy regained its pre-crisis level of output in the final quarter of 2010 and the negative effects of higher oil prices will be largely offset by the additional fiscal and monetary stimulus introduced towards the end of last year. ‘We estimate that the recent round of quantitative easing is roughly equivalent to a 100 basis point cut in short term interest rates this year. Although the economy will expand by 2.6% this year, the unemployment rate will remain at 9.7%, the report explains.

Japan was hit especially hard in the recession, but recovered especially fast in 2010 with GDP rising by 4.5%. ‘However, prospects dimmed as the yen appreciated and the government introduced late last year a fiscal stimulus worth 1% of GDP. The fiscal multiplier is large in Japan, helped by the fact that it is a relatively closed economy, which limits import leakages. As a result the budgetary boost should contribute about half of next year's GDP growth of 2.1%,’ the report adds.