If oil prices head above $100 a barrel, it could shave 0.2 percentage points from global economic growth next year -- but this hinges crucially on the dollar, according to Bank of America Merrill Lynch.
Sanctions on Iran, shale bottlenecks, Venezuelan turmoil, and increased demand pose an upside risk to prices, the bank said in a research note.
Higher prices would slow growth in the eurozone, UK, and Japan though ramped-up energy production in the US, Australia, and Brazil would likely cushion the blow to the world’s economy, it said. The dollar is the swing factor, according to economists Ethan Harris and Aditya Bhave.
A stronger US currency would “polarise outcomes further”, with oil importers suffering more and producers benefiting, while a weaker US currency would “play the role of equaliser”, they said.
“Higher oil prices seem inevitable, and in our view, $100 per barrel is easily within reach,” they wrote.
“We would put an oil shock in the top three of our concerns over the next year along with trade wars and the ’exit-sential’ risks in Europe,” they wrote.
Brent crude futures have risen over 25% to $84.35 a barrel. In late September, Merrill Lynch said it expects Brent to peak at $95 by the end of next June.
While the shale boom in the US means the country is less at risk from higher oil prices, the eurozone, Japan, China, and India stand to lose significantly from a spike, says the report. “Putting everything together, we think $100 oil could take two tenths off global growth in 2019,” state the economists.
“This is not a major impact, but it isn’t trivial either.”
Meanwhile, Italian finance minister Giovanni Tria said the government is worried by the “unacceptable” bond yield spread, which yesterday was nearly at its widest in more than five years. After hitting 316 basis points, Italy’s 10-year yield spread against similarly dated German bunds narrowed yesterday to just below 300 basis points.
“Although so far there hasn’t been an explosion as some feared, we are of course worried,” said Mr Tria.
The euro was down against the dollar at $1.148, and 0.5% against a stronger sterling, at 87.38p.
Surveys showed British consumers turned more cautious about their spending in September after going on a summer spree, suggesting the economy can no longer cope on them quite as much to soften the drag of Brexit.
Shops reported that total spending edged up last month, said the British Retail Consortium. A broader measure of consumer spending by Barclaycard increased by the smallest amount in five months.
- Bloomberg and Reuters