From: "John Smith" 
Newsgroups: uk.finance
Subject: Recession likely if 30-year rule holds
Date: Tue, 02 Nov 2004 22:50:56 GMT

http://icbirmingham.icnetwork.co.uk/0150business/0200news/tm_objectid=14806240&method=full&siteid=50002&headline=recession-likely-if-30-year-rule-holds-name_page.html

Recession likely if 30-year rule holds Oct 28 2004




      By Raj Rajendran


      A recession could be staring the world's major economies in the face 
by next summer if history repeats itself and a 30-year rule holds true that 
output slumps after oil prices spike.

      Optimists say the old relationship is dead, that companies are more 
competitive, energy efficiency is ingrained into corporate culture and 
today's high oil prices are driven by huge demand.

      But others say the link between the four big oil price spikes of the 
past three decades and industrial production in the world's biggest 
economies means recession is inevitable after a year-to-date 70 per cent 
surge in oil prices.

      "The percentage increase from previous levels show the same pattern as 
the present one," Dieter Wermuth, consultant to UFJ Bank and partner of 
Wermuth Asset Management said.

      "In the previous cases, such oil price increases were followed by a 
recession and one could come, even though the oil price increase is the 
result of a booming economy," he said.

      US light crude oil prices hit a record of $55.67 a barrel on Monday.

      The strong inverse relationship between oil and US and German 
industrial production has been observed since 1973, and confirmed in 1981, 
1991 and most recently post September 11.

      Recent moves in industrial metals prices also appear to support the 
view that the global economy is slowing more quickly than expected, 
especially after a sharp sell-off last week.

      "If this sell-off were to gather momentum, it would provide one of the 
clearest signs yet that global growth might be about to enter a slower 
pace," said Merrill Lynch chief global investment strategist David Bowers.

      Investors have cut speculative positions on the London Metal Exchange, 
with total open interest for LME metal and product contracts sinking by 
about 10 per cent to around 800,000 lots in the week ending October 22.

      But others play down the risks. "Higher oil prices have less effect on 
the industrialised economies than they had some decades ago, and the recent 
hikes have only marginally slowed growth in the major OECD economies," the 
OECD said in a report entitled Financial Market Trends.

      Like the OECD, many private sector economists expect red-hot oil 
prices to shave robust global growth by only about 50 basis points next 
year.

      They say the industrialised world's substantial services sector is 
another factor balancing out the impact of higher oil costs on the 
comparatively small, albeit energy-intensive, manufacturing industry.

      They also say the absence of inflation and low wage growth show that 
he risks to economic expansion remain muted. Mr Wermuth disagrees and says 
if policy makers fail to trigger counter-cyclical rate moves when the need 
arises, a recession cannot be ruled out.

      He expects the US Federal Reserve to pause in its rate tightening 
cycle after an increase at its November meeting and sees no hikes from the 
European Central Bank anytime soon.

      "When you have such high oil prices it's not just investment but 
consumption that will be affected," Mr Wermuth said.

      More analysts are coming to this view on the back of slowing consumer 
spending.

      "We see US consumer spending growth slowing to 2.7 per cent in 2005 
from what looks to be a 3.5 per

      cent advance this year. This would represent the softest pace since 
2001 and second weakest since 1995," said Merrill Lynch economist David 
Rosenberg.

      Retail sales in the euro zone and the UK are starting to show signs of 
fatigue with rising utility and heating oil bills set to crimp consumer 
spending further going into the winter.

      Industrial production is still inching up in the United States, but is 
becoming patchy in the euro zone, falling 0.6 per cent in August after 
rising 0.2 per cent in July.

      In the UK - which has been hiking rates since November 2003 to curb 
inflation risks that have worsened as oil has soared - manufacturing output 
fell for the third month running in August and at the sharpest pace in 
nearly two years.

      Oil prices are unlikely to shed the bulk of their recent big gains due 
to several factors including the demand/supply imbalance, lack of spare 
production capacity and security woes in Iraq and the Middle East, experts 
say.

      Demand for oil in fast-growing China and India shows no sign of 
slowing either and that means prices are set to stay high - further 
exacerbating the problems of industrialised economies.

      "They will keep oil prices high even if we get a slowdown in the US," 
Mr Wermuth said.