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EPHEMERAL ENERGY: World economy relying on unstable energy boost

For now at least, lower energy prices may indeed be a lifeline for a nervous world economy but it's a lonely positive and far from a stable one.

July 9, 2012 4:24 by

Monday’s news of a sharp drop in Chinese inflation to a 29-month low of 2.2 percent in June showed just why China’s central bank felt it had the room to cut interest rates last week again for the second time in a month.


But the picture is global. Data from the Organisation for Economic Cooperation and Development shows annual inflation in the 34-country OECD area slowed to 2.1 percent in the year to May 2012 from 2.5 percent in April and was the lowest rate since January 2011 – all heavily influenced by oil and food prices.


JP Morgan economists Joseph Lupton and David Hensley say their measure of global inflation for June is set to move below the aggregated 2.6 percent global central bank target – taken from 26 countries they monitor – for the first time since September 2010 after peaking at 3.9 percent nine months ago.


“If our top-down model is correct, global consumer price inflation could slide to just 2.1 percent by year-end, 0.5 percentage point lower than both our forecast and central bank targets,” the economists said.


What’s more, they added that the slippage is most skewed for the developed economies where consumer prices are more sensitive to moves in oil prices and could both accelerate monetary easing and boost consumer spending there in particular.


“In response to this sharp boost to purchasing power, global consumer spending should accelerate in the second half of 2012. Indeed, based on its historical relationship with oil prices, global consumer goods spending looks set to accelerate to one of the strongest gains in over a decade.”


Other global economy optimists have also picked up on the potential windfalls from oil. Jim O’Neill, chairman of Goldman Sachs Asset Management, is keen to point out that five-year forward prices of oil – less prone to ebb and flow of short-term spot market moves – have fallen below their 200-day moving averages.


“I’d rather trust the 5-year price than the spot price, and it is now below its own moving average. This has to be good news for anyone, other than those long crude oil,” he told clients in series of slides last month.


What’s more, the broader energy price picture in the United States has for months contained a huge potential fillip as gas prices have fallen sharply relative to the rest of the world due to an unlocking of vast gas reserves in underground shale deposits. If similar deposits were exploited elsewhere in the world, the impact could spread longer-term.


“With little other positive news to grasp onto in recent months, shale gas offers a welcome diversion from the torrent of Eurozone crisis headlines,” said Rob Carnell, chief economist at ING Financial, adding the impact was “significant” for growth inflation and jobs if not as revolutionary as some suggest.

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