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Slower growth seen because of high oil price [25-02-2011]  
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Higher crude oil prices will mean a slower pace of economic growth overall while inflation, already seen in higher food costs, will become more marked.

Crude oil prices touched US$100 in late Wednesday trading on the Nymex in the United States and was around US$101 per barrel yesterday while Brent, the European benchmark for crude oil, spiked to almost US$120 but later hovered around US$115 on worries of escalating political tension in North Africa and the Middle East.

Economists expect higher oil prices to have a negative impact on growth by placing more obstacles to the already-fragile recovery in developed economies and putting more pressure on inflation especially among emerging economies.

This would also impact corporate earnings, a fact that has not escaped investors who have moved to safe-haven instruments, including gold, now trading at over US$1,410 per ounce.

The extent of the impact on economic growth would depend on the upside in prices, Oversea-Chinese Banking Corp Ltd economist Gundy Cahyadi told StarBiz. “We believe oil prices will rise gradually more than anything and will not be near prices seen in 2008,” Gundy said. In mid-July, 2008, oil was traded at US$147 per barrel.

While governments in Malaysia and Indonesia might delay further cuts to subsidies for fuel and other basic staples, the higher prices of commodities will still mean a build-up in inflationary pressure.

“We've already seen inflationary pressure building up since end-2010 and should oil prices continue to go higher, then we'll see more price pressure build-up,” Grundy said.

In a report yesterday, CIMB Investment Bank Bhd said a sustained high oil price would put a damper on economic activity and corporate earnings, and fuel inflation.

“The impact may play out over a period of time if the uptrend in oil prices is gradual. Every US$10 rise in the oil price may lop 0.3% to one percentage points off gross domestic product (GDP) growth for Malaysia, Singapore, Indonesia, Thailand, China and Hong Kong,” CIMB head of economics Lee Heng Guie (pic) said.

Besides high oil prices, Lee said, the performance of these countries under the bank's coverage would have to take into account the still-uneven pace of recovery in the advanced economies and domestic risks.

He added that the impact of high oil prices on these economies would depend on the extent of each country's “oil intensity” (that is, number of barrels of oil needed to generate US$1,000 of GDP) and dependence on oil imports.

“High oil prices will have a positive impact on net exporting countries though these benefits can be offset by negative effects elsewhere. For net oil importing countries, the impact will depend on how much they consume,” Lee said.

These effects, he said, would be transmitted through the demand side and higher oil prices, reducing households' real incomes, prompting them to cut back consumption. On the supply side, an increase in oil prices raises production costs and induces firms to reduce output.

Lee expects the lagged impact of high oil prices to be felt more in 2012, especially if the uptrend in oil prices was gradual.

He said inflationary pressure was also a cause for concern although for Malaysia, this was benign, at 2.4%, for January since administrative restraints held prices of essential items in check. “Topping the inflation league is Indonesia at 7% in January 2011, followed by Singapore (5.5%), China (4.9%), Hong Kong (3.9%) and Thailand (3% in Dec 2010).”

As food and fuel were core elements in Asian household budgets, Lee said, sustained price increases not only eroded consumers' real purchasing power but would also spill over to general inflation pressures.

According to Citigroup Inc economists, Johanna Chua and Kit Wei Zheng, for the magnitude of the oil shock for Asia to reach 2008 proportions of around 2.3% of GDP (when oil prices averaged around US$98), the average Brent oil price should be around US$120 to US$125 in 2011. This is after taking into account trends in oil intensities over time.

However, they noted that at least one buffer to growth from a sustained oil price shock was the declining oil intensity of the East Asian region over the past decade. “This is attributed to energy efficiency gains in manufacturing, and the rising share of less energy intensive services sectors in the GDP.”

Source:THE STAR
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