Double Dip recession nears
"It now appears as though the probability of a 'double dip' is increasing, but not because of global competition and deflation," Merrill Lynch chief US strategist Richard Bernstein said in a report Monday. "Rather, it is increasingly difficult to rule out a recession caused by an old-fashioned oil shock."
Double dip recession fear in US
10/02/2003 22:43 - (SA)
Washington - Surging oil prices are beginning to raise fears of a new oil shock that could tip the US economy back into recession, analysts said.
"It now appears as though the probability of a 'double dip' is increasing, but not because of global competition and deflation," Merrill Lynch chief US strategist Richard Bernstein said in a report Monday.
"Rather, it is increasingly difficult to rule out a recession caused by an old-fashioned oil shock."
Oil prices climbed to new two-year highs in London on Monday despite a Franco-German push to thwart war in Iraq, chasing the US market higher after snowstorms pushed heating oil prices to a record peak.
The price of benchmark Brent North Sea crude oil for March delivery rose to $32.51 from 32.34 at the close of trading the previous session, levels not seen since November 2000.
In New York, the reference light sweet crude March contract leapt 96c a barrel to $35.12 on Friday, the highest level for two years and five months.
"Although we have questioned whether the economy would be as strong as investors expected, we have not up until now been concerned about a 'double dip' recession," Bernstein said.
But it was now harder to rule out such a scenario, the economist said, with rising energy prices already starting to constrain consumer purchasing power.
"A war probably won't help this situation, at least in the near-term," Berstein added.
John Lonski, Moody's Investors Service chief economist, said it would probably take more than sharply higher oil prices to push the economy back into a recession.
A return to recession "would involve something going terribly wrong regarding possible confrontation overseas," Lonski said.
But the economy was more susceptible to external shocks than it had been in late 1990s, when it managed to withstand the Asian and Russian financial crises because underlying economic growth rate was faster, he said.
Merrill Lynch's Bernstein said every significant oil shock in the past 30 years had been associated with a fall in real wage growth. Oil shocks had either caused or contributed to recession, he said.
"The loss of consumer purchasing power certainly contributed to, if not actually caused, the recessions associated with those three periods," the analyst argued.
"It seems pretty clear to us that we are experiencing another old-fashioned oil shock. We have previously commented that surging energy prices probably caused weaker-than-expected holiday retail sales. On Friday, crude oil, natural gas, and unleaded gasoline futures all closed at life-of-contract highs."
A report by the economics team at Wachovia Corp. said oil prices might depress consumer spending, which makes up two-thirds of economic activity, but they were unlikely to actually lead to a contraction.
A rise in gasoline prices of about 7c a gallon in the past two weeks worked like a tax increase, leaving people less money to spend, it said.
"Consumers are now feeling the impact of these higher prices. Chain store sales came in well below expectations during January and February is thought to be off to a slow start," the group said.
Consumer spending was nevertheless likely to show solid growth in the first quarter of this year, it said.
But "beyond the first quarter, sustained higher gasoline prices could cause real problems for consumers and the economy," it said. "No matter how you slice it, however, rising gasoline prices and even a war with Iraq are not likely to produce an outright decline in consumer spending."
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