Bank of Ireland’s Monthly Bulletin July 2011

Slower global growth partly due to higher energy process according to Bank of Ireland’s Monthly Bulletin – Recent fall in oil prices will boost US more than Europe

The global economy appears to have slowed this year from the buoyant level seen in 2010; annual growth eased to 4.4% in the first quarter and possibly slowed further to around 4% in Q2, from over 5% this time last year. Two specific factors may have been responsible, however, and both may now be unwinding, at least in part, according to Bank of Ireland’s latest Bulletin which was published today, 7 July 2011.

Author of the Bulletin, Dr. Dan McLaughlin, Group Chief Economist, Bank of Ireland said:“The first is the impact of the nuclear incident in Japan, which has had a much bigger effect on the international supply chain than perceived at the time, particularly on electronics and autos. The global manufacturing sector has certainly slowed in recent months, but the surprise bounce in US manufacturing in June lends some support to the view that this supply shock may now be dissipating.

A second factor is the price of oil, which rose sharply in the six months to April. The historical evidence shows that global downturns are more often than not a consequence of high energy costs, and rising fuel prices have certainly eaten into household incomes this year. This is particularly so in the US, where the tax on fuel is much lower than in Europe, with the result that any given change in wholesale prices has a greater impact on the retail price.

“The corollary is that the recent fall in crude oil prices has had a bigger impact in the US; the price of gasoline has fallen by some 10% in the past six weeks, which may well help to support US consumer spending over the summer months, in the absence of a sharp rebound in crude prices. The wholesale price of fuel, which is priced in dollars, has also fallen in Europe since mid-May, but the impact has been diluted by two factors – the euro is weaker against the US currency, despite a rally of late, and the retail price in most European countries tends to be dominated by the tax component, which in Ireland currently amounts to around 84 cents a litre or some 56% of the total price. Consequently, Irish petrol prices are lower than a month ago but only by around 3 cents, or 2%. This illustrates why the US economy is more sensitive to oil prices than Europe, and may well grow faster than the euro area over the second half of the year. Oil prices are unlikely to fall substantially from here, however, unless the slowdown in global growth proves to be more substantial and prolonged”, concluded Dr. Dan McLaughlin.

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7 July 2011

For reference:

Dr. Dan McLaughlin                              Dermot O’Sullivan

Group Chief Economist                         Group Communications

Bank of Ireland Global Markets           Group Communications

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