I believe I am not the first one to note the effect of high oil prices on the economy, and I will most certainly not be the last one. Oil has been up of late due to all these uncertainties around North Africa and the Middle East, where oil is produced. The following chart makes it quite clear about the danger of having oil prices rising too much too quickly. It will likely derail the already uncertain economic recovery.
Source: St. Louis Fed
Back in 2008 when oil prices were rising to a record, a lot of explanations have been tossed around, including speculators (which Paul Krugman did not agree), emerging market’s growth in demand, which certainly included China:
The most important factor is the shift in favour of the developing economies. America has responded to high prices in familiar fashion: UBS forecasts that demand will drop by 1.1% this year and will be no higher in 2009 than it was in 2004. But demand from China and other emerging markets is more than offsetting this shortfall. – The Economist 15 May, 2008
China’s growing thirst for oil is often put forward as one of the main factors behind today’s higher oil prices. Demand for diesel there, for example, rose by over 9% in the year to April. – The Economist 29 May, 2008
For whatever reason it was, oil prices reached its all-time peak on July 2008, and on the same month, the China official PMI dropped below 50, indicating a contraction of manufacturing. In fact, long before the oil reached its peak, manufacturing has been slowing down.
Source: China Federation of Logistics & Purchasing
The point I circled in the above chart was April 2008 when the PMI peaked, and oil prices continued to rise until July. Are we in a similar situation now? Maybe. First of all, PMI has been slowing, but prices have been rising, and the PMI may continue to weaken. In fact, the HSBC/Markit flash China PMI for February (an advanced estimate) suggested a continued slowdown. Second, oil prices are now surging, just like 2008 (although for different reasons). Third, the Chinese government is now keen to fight inflation, and it was just the same back in 2008. Should inflation persist, we should expect more tightening, which will definitely be a brake to the economy.
This article originally appeared here: Oil Prices Up and China Slowing Down
Also sprach Analyst – World & China Economy, Global Finance, Real Estate
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