The March edition of World Risk Developments from Export Finance and Insurance Corporation (EFIC) highlights new fears about oil prices threatening the world economy.
Oil has now replaced the eurozone as the main perceived threat to the world economy.
EFIC chief economist Roger Donnelly explains that aggressive liquidity injections by the European Central Bank plus a Greek debt exchange have eased fears about the eurozone crisis, but growing fears about crude oil prices have the markets worried.
Donnelly lists three reasons behind the recent rise in oil prices. The first, according to Donnelly is brisk demand with fuel-thirsty countries such as China and India continuing to expand their oil purchases rapidly.
The second is sanctions against Iran with importers reportedly switching to other suppliers ahead of the start of EU sanctions in July while the third factor is a growing fear of military conflict with Iran, which could spike oil prices higher and exert a powerful drag on economic growth, probably sending the world economy back into recession.
Even if the oil price subsides, Donnelly expects the eurozone crisis to flare up again because of a host of unresolved issues such as large fiscal financing needs among troubled ‘Peripheral’ countries and the danger of self-fulfilling solvency crises as they struggle to recover and outgrow their debts.
The newsletter also mentions a risk of renewed US slowdown if oil market or eurozone tail risks surface. Even if they don’t, fiscal retrenchment through spending cuts, and even more importantly tax hikes, could act as strong drags on growth in 2013.
The newsletter concludes that the world economy seems to be accelerating swiftly from its December quarter soft patch while emerging markets continue to act as a powerful global growth engine. The bad news is that growth is likely to be slower in 2012 than 2011.
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