Oil prices hit a record high of $78 per barrel driven up the escalating West Asia conflict. At the same time the Bank of Japan ended its zero interest rate policy by raising its key rte, for the first time in six years, to 0.25%. The Japanese move was a further signal that the global era of cheap money is over.
Analysts will be scrutinizing testimony in America by the Federal Reserve chairman, for clues on the likely peak in US interest rates, currently 5.25%.
Fears are growing of sharp slowdown in the global economy, triggered by big increases in energy prices and rising interest rates. Economists at HSBC say there is a greater risk a hard landing for both the world economy and Britain. According to HSBC, the risk is of monetary overkill with central banks raising rates too much. There is an increasing risk that tighter UK and global monetary policy causes a hard landing in 2007, it says in a new report.
It warns the Bank of England not to respond to higher inflation due to increases in oil prices by raising interest rates, as long as there is no evidence of so-called second-round effects on wage settlements.
Fears over the economic consequences of high oil prices will currently form the backdrop in international economic forums. An economist with Commerzbank, said that recurring increases in oil added to the risks. If it is just a temporary spike, then the government fiscal policies can carry on as before. But if this goes on for any length of time and oil continues to rise, then it will be a global problem.
A senior energy economist at the Centre for Global Energy Studies, said that Oil could hit $80 or higher this week if the situation worsens. If a shortage of oil develops, the price will go up tremendously. It will skyrocket. It might hit $100 if a hurricane in the US causes destruction to facilities.
The recent period has been unusual in that, despite a trebling of oil prices over the past three years, the world economy has continued
to grow strongly, expanding at its fastest rate for more than three decades.
But leading indicators of the global economy, monitored by economists at Dresdner Kleinwort, point to a US-led slowdown already showed weak American retail sales.
Ian Harwood, chief economist said that they are looking for the US economy to slow to 2.5% but the risks are on the downside. Higher oil prices will intensify the pressure.
A survey company that specializes in managing insolvencies found that the number of British firms it deemed to be at risk of insolvency had jumped 70% in the first six months of the year because of the aforesaid factors.
The survey company also found that 4,692 companies a month on average were on the brink of insolvency, compared with 2,755 over the same period last year. The CFO also said that there was evidence of a classic credit squeeze.
Research released by Ernst & Young shows that 84 profit warnings were issued by UK companies in the first quarter, similar to the previous three months. Warnings by software and computer-service firms hit a five-year high.
A key feature of the uncertain economic environment is the volatility in the global markets, due in part to resurgent inflation. While the global economy is growing, rising prices with associated interest-rate rise are still creating a feeling of uncertainty.