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$100USD oil could slow growth in China and Japan

$100USD oil could slow growth in China and Japan

China and Japan could face significant economic challenges if oil prices soar above $100USD a barrel next year, according to a new report released on Tuesday by Bank of America Merrill Lynch.

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By Jackson Lewis 10.10.2018

China and Japan could face significant economic challenges if oil prices soar above $100USD a barrel next year, according to a new report released on Tuesday by Bank of America Merrill Lynch.

The price of oil looks set to rise during the next six months due to an uptick in demand, recent sanctions on Iran, the hyperinflation crisis in Venezuela and shale bottlenecks all carrying upside risks, the bank said in its report. These challenges could reduce expected global economic growth for 2019 by 0.2 percentage points.

While higher prices will fan pressures globally, China, Japan, the eurozone and the UK will be particularly vulnerable, as they are traditionally financial markets rather than oil exporters. In contrast, the United States would be able to weather the storm due to the current shale boom.

An increase in energy production in the US, Brazil and Australia would be enough to prevent the world’s economy from tanking, according to Bank of America Merrill Lynch, though the overall picture will hinge on the strength of the US dollar. Economists Aditya Bhave and Ethan Harris believe that the greenback will be a key swing factor heading into next year.

A stronger dollar is likely to “polarize outcomes further” as producers ride the wave and enjoy the upswing of an oil price surge while importers suffer. The volatility of any outcome could stabilize from the US currency showing signs of weakness in the coming months, as this would “play the role of equalizer,” the two economists said.

"Higher oil prices seem inevitable, and in our view, $100USD per barrel is easily within reach," Bhave and Harris noted. "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."

Brent crude futures are already on the up, having increased in price to $84.35USD per barrel at a 25% rise so far this year. The Bloomberg Dollar Spot Index has also climbed 3% during the same period. Bank of America Merrill Lynch is bullish on oil prices, as it expects Brent to continue on an upward curve and top out at $95 per barrel by next summer.

Surging oil prices will be an unwelcome distraction for China as it continues to battle with the US on trade tariffs. This particular standoff is now set to run into next year, with neither side willing to back down. For the rest of the world, oil prices could soon become a pressing concern, though Bhave and Harris believe that the countries benefiting from the uptick will cushion the blow of any downsides.

They added: “Putting everything together, we think $100USD oil could take two-tenths off global growth in 2019. This is not a major impact, but it isn't trivial either."

The International Monetary Fund said on Tuesday that the world is facing productivity challenges in the long term due to sluggish growth in this area and a rise in aging populations. Global growth should cool to 3.6% by 2022, and “meager gains” from growth have enriched the wealthy, which has driven support for anti-establishment leaders across the globe. 

IMF Chief Economist Maurice Obstfeld added: “Policymakers must take a long-term perspective to address this malaise. Inclusive fiscal policies, educational investments, and ensuring access to adequate health care can reduce inequality and are key priorities.”

The IMF also lowered its growth forecast for China on Tuesday due to the impact of its trade war with the US and said that global growth could also slow next year if the long-running conflict continues.

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