Oil the key drag on growth

The global economic slowdown will weigh on Canadian growth, as demand for resources dwindles, according to the Conference Board of Canada. The think-tank cut its forecast for 2009 GDP growth to just 1.5%, down from 2.2%.

“High resource prices have bolstered Canadians’ real income for six years, including 2008. In 2009, this source of strength will evaporate,” said Pedro Antunes, director, national and provincial forecast. “Still, Canada is expected to skirt a recession in 2009. Although the economy in general is slowing, it is still growing.”

Meanwhile, the economy of the United States is expected to grow by just 0.5% in 2009, as nervous consumers tighten their purse strings.

While the world economy struggles against the undertow generated by the U.S. real estate bubble and the ensuing credit crisis, CIBC World Markets says an even greater anchor on global growth is the 500% increase in the price of oil since 2002.

“Four of the last five global recessions were caused by huge spikes in oil prices. And the world economy is coming off the mother of all spikes,” says Jeff Rubin, chief economist at CIBC World Markets. “Over this cycle, real oil prices have risen over 500%, twice the rise in real oil prices that produced the two biggest recessions in the post-war era.”

Past oil spikes have marked the transfer of billions of dollars from the developed nations in the Organization for Economic Co-operation and Development to OPEC member states. The latest spike in oil prices has seen the movement of trillions of dollars.

The OECD countries tend to have lower savings rates than their OPEC counterparts; Saudi Arabia boasts a savings rate of about 50%, for example.

“While many of those petro-dollars get recycled back into the financial assets of OECD countries, many of them never get spent,” says Rubin. “Hence, the redistribution of global income from oil-consuming countries to oil-producing countries is far from demand-neutral insofar as the global economy is concerned.”

The U.S. alone has seen its oil import bill climb by $200 billion since 2005. For the entire OECD, oil purchases have increased by $700 billion over the same period, with $400 billion going to OPEC member states.

The high savings rates of OPEC countries means that much of the $400 billion that flowed into their coffers has essentially leaked out of the global economy.

Despite the U.S. being the world’s largest consumer of oil, its economy is partially shielded from price spikes by the fact that the country is also a producer of 5 million barrels per day.

Other OECD members are not so lucky. Japan and most European countries produce no oil at all and are therefore more susceptible to energy shocks.

Rubin says that the true impact of oil spikes has historically not been felt until about a year after the run-up. The price spike that sent oil to $147 per barrel in June 2008 started in the third quarter of 2007, and he predicts that the maximum impact will be felt in the final months of this year.

“By the same token, however, the impact from the even larger decline in oil prices over the last two quarters should give its maximum boost to the economy over the next six months,” Rubin says. “If triple-digit oil prices are what started the recession, then $60 oil prices are what will end it.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(11/03/08)