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Oil prices start to chip at global growth forecasts

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The steep rise in oil prices as unrest shook several countries in the Middle East and North Africa has rekindled fears of a global growth slowdown, and economists are starting to mull downward revisions to their expectations.

Oil markets have taken a breather in recent days, but so far this year oil has risen nearly 11% as geopolitical concerns centering in the Middle East and North Africa have powered oil’s rally.

High prices mean higher gasoline prices, which in turn have stoked concerns of rising inflation just as the global economy appeared on the mend after the 2008 financial crisis.

At least one big bank has lowered its expectations for global growth partly based on the rallying oil prices. Other private-sector economists say they’re holding off — unless oil prices spike again.

Economists at Bank of America Merrill Lynch had been leaning toward upgrading their forecast for global growth but the surge in oil “more than cancels out that upgrade,” they said in a note earlier this week.

Instead, they slightly trimmed their global gross domestic product forecast for 2011 and 2012 to 4.3% and 4.8%, respectively. They have also bumped up their expectations for global inflation this year to 3.9%.

“Even with this forecast revision, the risks around growth are heavily skewed to the downside. If the production shutdown spreads outside of Libya, we will be revisiting our forecast again and if oil prices go above their historic peak of about $150 (a barrel) on a sustained basis, a global recession becomes a real risk; at $200/bbl a recession seems almost certain,” they said.

Analysts from Credit Suisse kept their global growth forecast at 4.5%, saying in a note distributed Friday that the oil price surge is “a downside risk to the growth outlook, but we would await more extreme price levels before adjusting growth forecasts down.”

Others have said the world could handle oil around $100 a barrel, but would start adjusting their forecasts if the increases get more extreme.

“Oil at $100 is going to slow things down, but not enough to push us back into a recession,” said David Wyss, chief economist at Standard & Poor’s. “It’s not negligible, but not a big enough hit.”

Oil around $150 would be a different matter, Wyss said. That would top oil’s record price in the summer of 2008, before the global recession hit in earnest and oil dropped to $30 a barrel.

“A worst case involving disruption to Saudi production would take us to $200 (a barrel) or higher, and would indeed derail the recovery,” economists at IHS Global Insight said.

But things may be starting to calm down a bit. Oil futures in New York closed lower for the fourth consecutive day on Friday, as many investors believed Libya’s turmoil, while still ongoing, had already been adequately priced in the market.

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