The impact of higher oil prices on the global economy is a growing concern, the International Monetary Fund said on Wednesday. "Looking ahead, limited excess capacity in the oil sector is likely to persist well beyond 2006 and prices will continue to be susceptible to geopolitical events," IMF said in its semi-annual World Economic Outlook.
IMF economists said to date higher oil prices have had a more moderate impact on the global economy than generally expected, in part because inflation has been held in check and much of the price runups have been driven by strong global demand.
But looking forward, the IMF said it is worried the full effects of the recent surge in energy prices may not yet have been felt, especially if producers and consumers are still treating the spike as temporary rather than permanent.
Helping to spur concern is the recent increase in "geopolitical uncertainties" in the Middle East, with options trading data suggesting a 15 percent chance that oil prices will spike above $80 per barrel by mid-2006, IMF said.
Moreover, with prices increasingly being driven by supply concerns, such as China and India's growing thirst for petroleum, the impact of higher oil prices may be greater than it has in the recent past, IMF said.
To help cushion the impact of ever more volatile energy markets on world economies, IMF officials suggested that oil-producing countries, such as Saudi Arabia and Russia, eliminate obstacles to investment. They also called for a more equitable distribution of petrodollars so there is a suitable safety net for the poorest in oil-rich countries. Other suggestions included improving oil market data and strengthening conservation.
The IMF report noted that ethanol, a frequently touted substitute to petroleum-based fuel is growing in popularity in many countries, including Brazil and the United States, where fiscal incentives make it attractive. But economists cautioned the market is still in its infancy, given the need to ramp up a new infrastructure for the fuel and the vehicles.
IMF economists also called on US officials to consider higher gasoline consumption taxes, noting the country now consumes a quarter of the world's oil. That idea has typically been a political non-starter in Washington though, and this year will not likely be different given lawmakers are facing elections later this fall. The IMF will publish its entire economic report at: www.imf.org.
IMF PUSHES US 2006 GROWTH OUTLOOK UP, SEES RISKS: The US economy has bounced back so strongly from a slow period late last year that the International Monetary Fund lifted its estimates for 2006 growth, although it warned of significant risks.
In its World Economic Outlook issued on Wednesday, the IMF forecast the US economy would grow 3.4 percent this year, up from 3.2 percent it estimated in September, but estimated 2007 growth at 3.3 percent instead of 3.6 percent.
While corporate profits are growing and business investment and hiring are strong, "overall risks to the outlook are slanted to the downside," the IMF said.
"Specifically, the large current account deficit - 6.4 percent of GDP last year - makes the United States vulnerable to a swing in investor sentiment that could put downward pressure on the dollar and see a spike in long-run interest rates," it added.
The IMF has been warning for years that US deficits need to be brought under control and on Wednesday it singled out Bush administration fiscal policies as inadequate.
"Over the medium term, the US administration's plan to cut the budget deficit in half by fiscal year 2009 is unambitious," the IMF said. It also said the plan was "fraught with risks" since it relies on spending curbs while extending beyond 2010 tax cuts enacted in 2001 and 2003.
The IMF said weaker housing markets could hit consumer spending harder than currently anticipated and said the housing markets future "is a key uncertainty for the US economy."
It said it was unclear what the "wealth impact" will be if consumers could no longer rely on steadily rising housing prices to finance their spending, as many have been doing.
"If house price appreciation were to slow sharply, equity withdrawal would likely fall," the IMF said - a trend that could crimp not only spending but construction hiring as well.
Another risk the IMF cited was the possibility tighter labour markets and slowing worker productivity rates could lead to higher wages and force the Federal Reserve to keep raising interest rates to restrain inflation.
"With spare capacity in the economy nearly exhausted ... inflationary pressures could strengthen more than anticipated, necessitating a stronger-than-expected monetary policy response," the IMF said.
The Fed has raised US short-term interest rates 15 times since mid-2004 and is widely believed to be close to ending the current cycle of increases, which has brought its trendsetting federal funds rate target to 4.75 percent.
The IMF noted that long-term interest rates have risen less than short-term rates - even including some inversions when short-term rates topped long-term rates - but added that it did not see this as a signal of a downturn.
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