Global economy growth firm enough to absorb oil burden rise, says Morgan Stanley

Rising oil prices do not pose a major threat to aggregate global growth, as the increase in crude prices is largely driven by robust demand conditions, says a Morgan Stanley research.

Contrary to rife speculations among investors as to whether the recent rise in oil prices poses downside risks to global growth, Chetan Ahya, Morgan Stanley’s chief global economist, believes the answer to this depends on whether the rise is driven by a significant shift in demand or supply.

According to the global financial services major, the current rise in oil prices is taking place against a backdrop, where global growth has been strong and above trend for the past five quarters.

“Combining the projected rise in oil demand and prices, we calculate that the global oil burden will rise to 3.1 percent of global GDP in 2018 from 2.4 percent in 2017,” Ahya, said in a research note and added that the global economy, however, is “well-positioned” to absorb this moderate rise in the oil burden.

Morgan Stanley’s global oil strategist Martijn Rats expects oil prices (Brent crude) to rise gradually to USD 85 a barrel by the fourth quarter of 2019.

“A recovery in investment growth has been followed by an uptick in global productivity growth. On the whole, the buffer of these productivity gains should help the economy withstand the rise in input costs,” the report noted.

Citing the example of China, the report said during the 2003-07 period, strong growth in China resulted in an increase in oil demand and prices.

However, as this growth was driven by strong productivity gains, macro stability indicators like inflation and current account surpluses remained in check and growth continued on an upward trajectory, virtually unperturbed by the rise in input costs.

“Given that the rise in oil prices is an endogenous response (based on internal factors) to strong global growth and that the oil burden is not at onerous levels, at this juncture we are inclined to think that rising oil prices do not pose a major threat to aggregate global growth,” Ahya added.