Is the world now in a dual oil-food price shock?
Scotia Capital economist Derek Holt believes so. And while he doesn’t see it killing the economy, he does see it slowing the nascent recovery.
Oil prices surged Tuesday on the violence in Libya, which represents 2 per cent of global output. Crude costs have been bouncing around for several weeks now on the turmoil in the Middle East and north Africa, where a Tunisian uprising drove out the regime and sparked protests in other countries, including Egypt. Food costs, in turn, have been steadily climbing.
Household balance sheets in both developed and emerging markets, Mr. Holt said in an interview, are not yet strong enough to withstand sharply higher energy and food costs.
Some countries such as Britain are already grappling with inflationary pressures, which puts central banks like the Bank of England in a dilemma -- whether to hike interest rates to keep prices in check but in turn threaten their economic recoveries.
“This is getting much more reminiscent of 2008 by the minute as an oil shock is being imposed upon fragile recoveries, only to be met by central bank talk of taking the punch bowl away,” Mr. Holt said earlier in a research note.
In an opinion piece earlier this month in The Financial Times, New York University Professor Nouriel Roubini, chairman and co-founder of Roubini Global Economics, pointed out that three of the last five recessions globally followed a Middle East "geopolitical shock" that drove up oil prices. In the other two, he noted, oil also played a role.
"Even before the recent political shocks in the Middle East, oil prices had increased above $90, driven not only by the fundamentals of a global economic recovery but also by non-fundamental factors: a wall of liquidity chasing assets and commodities in emerging markets amid near-zero policy rates and quantitative easing in advanced economies; momentum and herding behaviour (as in 2007-08); and limited and inelastic supply of new oil capacity," Mr. Roubini said.
Capital Economics, in a research note Monday, suggested that the unrest in Libya likely has doubled the “additional risk premium” in oil prices to about $10 a barrel from $5.
“The unrest in Libya is particularly worrying for a number of reasons, including the regime’s apparent willingness to use extreme violence against the opposition,” said Julian Jessop, chief international economist at Capital Economics in London.
“On top of this, Libya is the first major oil exporter to be engulfed by the crisis and the first to see any significant disruption to oil production.”
Mr. Jessop pointed out that such an increase in oil prices is “not insignificant,” particularly for the weaker economies of Europe that are already in dire straits because of the debt crisis.
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