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Friday Notes

Global economy: Slipping on oil?

Fri, Jun 20 2008, 12:33 GMT
by HVB Group Global Markets Research

HVB Group

● Risk. An oil price of USD 200 per barrel is within reach – over the medium term! But even in the short term, i.e. two to three quarters down the road, it is entirely possible to envision constellations that will drive the oil price in this direction – albeit only as a risk scenario. In our baseline view, we expect the pace of increase in oil prices to moderate substantially (pages 4-6).

● Recession. A surge in the price of oil to USD 200 would, however, have serious repercussions for the global economy. Our simulations show that the US economy would, and the EMU could, fall into recession. Emerging Markets would also have to come to terms with huge growth losses, with China’s commodity-based development model facing a serious challenge (pages 7-10 & 11-13).

● Inflation. At the same time, inflationary pressure would increase massively. The CPI rate is expected to jump to 5¼% in the US and 4¼% EMU-wide under our oil risk scenario. Those are readings that we have not seen in almost two decades (cf. chart). And in Emerging Markets, double-digit inflation rates would again become the rule.

● Reaction. For central banks, this combination of recession and inflation would be a nightmare and difficult to combat. Ultimately, the Fed would ease, while the ECB should continue to hike, followed by an easing cycle thereafter (pages 2-3). Support would come from falling oil prices, since demand for "black gold" would decline in such a scenario for the first time since the global recession in the early 80s.

● Further topics:

• – Switzerland: Central bank ignores market expectations (page 14).
• – Data outlook: Business climate numbers in the eurozone continue to decline; Fed to leave its key rate unchanged next week (page 15).
  
• – Market outlook: Bonds well supported, EUR to hold its own (p. 25).

• Download full Friday Notes with charts

Published on  Fri, Jun 20 2008, 12:38 GMT

Archive

• Inflation: No all-clear yet
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• Eurozone on the brink of recession
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• US economy on federal life support
  Published On Fri, Aug 8 2008, 12:17 GMT
• Mounting recession risks in Europe
  Published On Fri, Aug 1 2008, 13:00 GMT
• US labor market – just a mirror image of the growth weakness
  Published On Fri, Jul 25 2008, 12:50 GMT

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