The oil price spike is going to hit global GDP, but don’t expect it to tank the U.S. like it did in the 1970’s, according to Bank of America Merrill Lynch Ethan Harris and Alberto Ades.The headline hit to global GDP growth in 2011 will be a mere 0.1%, with a similar hit in 2012, that will trim growth back to 4.3% in 2011, and 4.8% in 2012.
But in the U.S., we shouldn’t expect anything like the economic slip brought on by the 1970’s disruption.
From Bank of America Merrill Lynch’s Ethan Harris and Alberto Ades:
In the 1970s, oil shocks had large impacts on both growth and inflation. This reflected stronger union power, wage indexation and lack of central bank credibility. However, a wide range of research suggests oil shocks have less powerful impacts today. For example, a 2007 study by Blanchard and Gali found that an unexpected 10% increase in oil prices reduced US GDP growth four quarters later by nearly 0.5 pp in the 1970s and early 1980s, but by less than 0.2 pp since 1984. Similarly, a 10% shock raised US CPI inflation by about 0.5 pp in the pre-1984 period, but only by 0.25 pp on average since 1984.
Ades and Harris go on to say that the U.S. market is now less reliant on foreign oil refining and that it has a sizable natural gas supply to fill some of the gaps. That’s likely surprising to some who think are markets are now more reliant on foreign oil production then ever before.