Soaring oil prices sound alert for the global economy

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The Independent Online

Record oil prices are sending an urgent "wake up call" to the world to take action to boost production or cut energy use to prevent a global economic slowdown, the International Monetary Fund said yesterday.

The world's leading financial watchdog raised its forecast for world growth this year to a three-decade high but pencilled in a slowdown for next year.

The world economy will expand by 5.0 per cent this year before slowing to 4.3 per cent next year, a downward revision of 0.1 percentage points from its spring forecasts. The IMF's chief economist, Raghuram Rajan, said: "The balance of risks has shifted to the downside with further oil-price volatility a particular concern. While it would be alarmist to see this as the first resource crisis of the 21st century, it's certainly a wake up call."

He said it would not be possible for households in China and India, the fastest growing developing countries, to consume energy "as much and as inefficiently as the average suburban American household". He said oil markets had been hit by a global recovery, a red hot Chinese boom, terrorist attacks on oil supplies and a shortage of refining capacity.

"The sharp rise in oil prices has contributed to the weakening of the expansion in recent months and will likely continue to do so for several quarters," he said. "This underscores the need to reduce vulnerability through concerted measures to restrain the growth of oil demand and through investment in capacity expansion in oil-producing countries."

The fund was keen, however, to play down the impact of rising oil prices, saying it would be "moderate", especially compared with the oil-fuelled recession of the mid-1970s.

It said if the recent $8 a barrel rise in prices were sustained for a year, it would wipe about 0.5 of a percentage point off growth. But it said the scale of price rises had been less sharp and rapid than in the past, adding that rich countries were less dependent on oil than in the past. The IMF added that a slowdown or even a crash in the Chinese economy would actually be beneficial. David Robinson, its deputy research director, said: "I would have thought that it would be modestly helpful if China slowed as demand for oil would be coming down and so, presumably, the pressure on oil prices would tend to decline."

The IMF played down fears that a Chinese crash could pole-axe the global economy, saying even a 10 per cent fall in imports would only knock 0.3 of a point off growth. It repeated its pleas to the US and the eurozone to take advantage of the global upturn to reduce their fiscal deficits in the light of the looming problem of the retirement of the babyboom generation. Mr Rajan said: "Without further action there is a serious risk of shortfalls in many regions, leaving the world significantly more vulnerable to the shocks it will inevitably face in the future."

The US is forecast to grow by 4.3 per cent this year and 3.5 per cent next year, a cut of 0.3 of a percentage point from the IMF's forecasts in the spring.