Bloomberg: Rising oil prices may mean US recession

Business Times - 13 Nov 2007

Rising oil prices may mean US recession

US growth expected to slow to less than 2% in the fourth quarter

(NEW YORK) Rising fuel prices that businesses and consumers took in stride earlier this year may now be near the point of pushing the weakened US economy into recession.

'We are in a danger zone,' says Nariman Behravesh, chief economist at Global Insight and a former Federal Reserve economist.

'It would take two shocks to bring the economy to its knees. We got one shock in the form of the credit crunch. Oil could be that second shock.'

Crude-oil prices are poised to cross the US$100-a-barrel mark while the US economy is still reeling from a surge in corporate borrowing costs.

Europe and Japan are vulnerable as well, after the US sub-prime mortgage collapse contaminated their credit markets.

Even before the latest jump in energy costs, economists expected US growth to slow to less than 2 per cent in the fourth quarter - half the third quarter's pace.

Andrew Cates, UBS economist in London, said his models suggest a 45 per cent chance of a US recession next year, up from 33 per cent last month, as oil prices prove a 'growing concern'.

Japan risks its fourth recession since the early 1990s, with its index of leading economic indicators falling to zero for the first time in a decade.

The European Commission last week cut its 2008 growth forecast for the 13 nations that share the euro to 2.2 per cent from 2.5 per cent, partly because of costlier crude.

The economy grew 2.8 per cent last year.

The world economy may still dodge recession as emerging markets continue to expand.

A report last week by Deutsche Bank said gains in energy efficiency mean the effect of more expensive oil will 'remain muted'. Even so, gloom is spreading at a speed that suggests 'we're walking a really fine line', says John Silvia, chief economist at Wachovia Corp.

'Even a month ago, you probably wouldn't have thought we'd be seeing a sustained credit problem and oil holding up above US$85 a barrel.'

Crude oil traded at a record US$98.62 last week on the New York Mercantile Exchange and ended the week at US$96.32, bringing its increase this year to 58 per cent.

Prices adjusted for inflation exceed the previous record, set in 1981 when Iran cut exports.
The dilemma for central banks is how to balance oil's drag on their economies against the risk of higher inflation.

Fed chairman Ben S Bernanke told Congress last week that oil prices threaten both 'renewed upward pressure' on inflation and 'further restraint on growth'.

Such concerns prompted the European Central Bank to keep interest rates on hold last week, and president Jean-Claude Trichet said he still sees a danger that inflation will accelerate.

-- Bloomberg