A continued upsurge in oil prices in the past two months has compelled investment bank Morgan Stanley to cut its global gross domestic product forecast for next year from 3.9 per cent to 3.6 per cent, with more cuts likely in the near term. The investment bank has also cut China’s GDP growth forecast for 2005 from 7.5 per cent to 7 per cent.
“As the odds of a full-blown oil shock rise, the prospects of outright global recession in 2005 loom more and more likely,” said Morgan Stanley’s chief economist Stephen Roach in a note to clients. Roach also warned that “there are more cuts to come”.
Morgan Stanley cut its 2005 growth forecasts for all the regions, with Asia ex-Japan’s growth forecast cut by 0.3 percentage point to 5.5 per cent.
Roach said the cut in mainland’s growth forecast – where administrative measures have been put in place to slow the pace of breakneck growth – was all the more dramatic.
“Our projected deceleration in 2005 is all the more dramatic – more than 25 per cent slowing in real GDP and a good deal more than that in industrial output,” Roach said. Crude oil prices have continued their relentless march higher. In New York morning trade on Monday, crude for November delivery eased 48 cents from overnight levels to US$54.45 a barrel on the New York Mercantile Exchange. In London, the new Brent crude contract for December fell 37 cents to US$49.56 a barrel.
Some traders have talked of crude prices hitting US$60 a barrel in the coming winter months.
United States Federal Reserve chairman Alan Greenspan said last Friday that high prices had already cut of a per cent from US gross domestic product. “So far this year, the rise in the value of imported oil – essentially a tax on US residents – has amounted to about per cent of GDP,” said Greenspan. “The risk of more serious negative consequences would intensify if oil prices were to move materially higher,” he said.
Oil’s latest surge higher, adding nearly US$12 since mid-September, has been spurred by an outage in US Gulf production after pipeline and platform damage from September’s Hurricane Ivan.
Gulf of Mexico output is operating at 73 per cent of its normal rate of 1.7 million barrels per day. Some fields are expected to remain shut beyond the end of the year, the US government’s resource agency said last week.
The shortfall has limited refiners’ ability to build up US heating oil stocks, which at 50 million barrels are 10 per cent below last year, weekly government data showed last week.
Roach said the bank has raised the estimate of peak in oil prices by US$10; that is consistent with Brent crude topping out at US$50 a barrel this month.
“By our reckoning, the new equilibrium for oil prices is now somewhere in the [US]$30-40 range, well above the [US]$20 average of the 1990s,” Roach said.