March 4, 2012 / 8:04 PM / 8 years ago

GLOBAL ECONOMY WEEKAHEAD-The good news behind oil prices

* Much of oil price gain reflects stronger world growth

* Job gains, wage growth allow US households to absorb costs

* Feb jobs report on Friday seen showing US resiliency

* Europe more vulnerable to oil price gains, some Asian countries

* Price surge may shave 0.2 pct off world GDP this year

By Stella Dawson

WASHINGTON, March 4 (Reuters) - Rising oil prices often are the death knell for economic recovery. This time around the surge in crude oil is looking more like a harbinger of better days.

Political tensions over Iran’s nuclear ambitions have pushed crude oil prices up 11 percent over the past month to around $123 a barrel, stoking concerns a violent confrontation that reduced supplies could send Brent crude above $150 a barrel.

Oil at that level could undermine a gradual strengthening of the world economy. Even at current levels, it could shave 0.2 percentage point from growth, analysts said.

Just as Europe’s sovereign debt problems have started to ease, oil has emerged as a new headwind.

But the Iran-driven spike masks a broader underlying trend, and as long as military strikes are avoided, it appears to pose only a limited risk. In other words, there is a good news story.

Crude oil prices have been climbing in fits and starts since early October in line with slowly improving economic data, especially in the United States.

Equity prices have risen in lockstep with oil’s advance. When the two rise together, it usually indicates a broad-based economic expansion. The Standard and Poor’s 500 index is up 17 percent since the beginning of October, and MSCI’s global equity index has recouped all its losses since the U.S. debt debacle last summer.

This suggests that roughly half of the 25 percent gain in the price of Brent crude since early October reflects a strengthening of global demand, economists said. The world’s factories are churning out goods at a faster pace, a key indication of the economy’s strength, meaning it is in better shape to handle a supply shock from Iran than a year ago.

“We think that crude oil prices have risen more because of improving sentiment regarding global growth than because of geopolitical risk concerns,” Deutsche Bank told clients.


A sterner test will be whether consumers can absorb the higher costs at the gasoline pump, since their spending accounts for about two-thirds of all economic activity in developed economies. And that will depend upon wage gains.

So far, the news here is reasonably encouraging too.

American wages and salaries have risen at a 5.7 percent annual rate in the seven months through January. Average hourly earnings, to be reported on Friday as part of the government’s monthly jobs report, are expected to have advanced by 0.2 percent in February from the prior month.

U.S. gasoline costs have accelerated at an even faster pace. They are up by 10 percent from their lows late last year and in California have topped the psychologically important $4 a gallon level. But so far the hit to the American wallet has been less severe than during the Arab spring a year ago.

A warm winter and a 30 percent plunge over the past three months in prices for natural gas, the fuel used to heat most American homes, have cut the average household energy bill. And more people have jobs today, providing more of a cushion to absorb costlier gasoline.

“So far there is no sign that these higher prices are getting in the way of an improving trend in U.S. consumer confidence currently supported by a better labor market,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland.

The U.S. jobs report for February due out on Friday is expected to show 210,000 new jobs were added outside the farm sector, the third month in a row of gains above 200,000. Tom Porcelli, chief U.S. economist at Royal Bank of Canada, said he will watch closely for signs of growth in higher-paying sectors, which would provide further support to consumer spending.

Otherwise, rising gasoline costs could start to bite. Porcelli said three to six months above $4 a gallon could shave half a percentage point off U.S. GDP, which economists currently see expanding around a 2.2 percent rate in 2012.


The dent could be even larger in Europe, where wages are lagging. Adjusted for inflation, the Organization for Economic Cooperation and Development estimates that wages in the euro zone this year will expand on average by 0.4 percent, and even less for Germany, Europe’s biggest economy..

Deutsche Bank reckons that if oil were to rise by 50 percent from its baseline, twice the advance so far, it would rob 0.4 percentage point from euro zone GDP in the first year. The region already is expected to contract slightly in 2012.

In Asia, the picture is more mixed and inflation the primary concern.

Many Asian economies have fuel subsidies, which would cushion the blow to households. But if governments start to pass on the energy costs, as Deutsche expects in India and Indonesia, inflation could rise sharply.

Inflationary pressures would complicate the role of central banks, possibly quashing prospects for further monetary support for the recovery.

But for now, rising oil prices largely are a growth story. (Reporting by Stella Dawson; Editing by Leslie Adler)

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