Surging oil prices are beginning to raise fears of a new oil shock that could tip the US economy back into recession, analysts say.
'It now appears as though the probability of a 'double dip' is increasing, but not because of global competition and deflation,' Merrill Lynch chief US strategist Richard Bernstein said in a report. 'Rather, it is increasingly difficult to rule out a recession caused by an old-fashioned oil shock.'
Many analysts, including US Federal Reserve chairman Alan Greenspan, have said high oil prices alone are insufficient to trigger recession, especially since oil plays a diminishing role in the economy.
But a recent surge in prices has led some economists to consider the threat seriously. Crude oil prices climbed to two-year highs on Friday, before easing off a litte on Monday.
'Although we have questioned whether the economy would be as strong as investors expected, we have not up until now been concerned about a 'double dip' recession,' Bernstein said. But it was harder now to rule out such a scenario, with rising energy prices already starting to constrain consumer purchasing power, the economist said.
Every significant oil shock in the past 30 years had been associated with a fall in real wage growth, Bernstein said.
And Morgan Stanley chief economist Stephen Roach said the economy was in a more precarious position now than during the 1990-91 Gulf War, when oil prices also had soared in anticipation of conflict. Recessions frequently required two steps: a weak economy and an external shock, he said.
Drawing parallels with the Gulf War, Roach said annualised economic growth had slowed to 0.9% by mid 1990. At the end of 2002, the growth pace had dropped 0.7%. Crude oil prices shot up 67% in 1990, he said. Since early 2002, prices had climbed 75%.
