Oil price hike 'could hit recovery'

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The Ernst & Young Item Club said the modest upswing in economic growth it was predicting for 2009 and 2010 was predicated on the price of oil remaining below 100 US dollars (£51) per barrel.

But it warned that if the cost of oil increased to 120 US dollars (£61) per barrel or 150 US dollars (£76) per barrel in the long-term, it would have serious implications for the strength of the wider economy.

It added that if the cost hit 200 US dollars (£102) per barrel, as one Opec minister recently predicted, then "all bets may well be off".

The group said if oil prices climbed to 150 US dollars per barrel it would trim its forecast for economic growth for 2009 from its current prediction of 1.5% to a weak 1.1%.

It said the following year, when many commentators had pencilled in a strong recover in GDP growth to 2.7%, high oil prices could dampen growth to less than 2%.

A long-term price of 200 US dollars per barrel for oil would cut economic growth even further to just 0.9% for 2009 and 1.2% in 2010.

It warned that such high oil prices would have an impact across the whole economy, adding that one of the main factors driving the predicted recovery in 2010 was increased consumption as high street spending picked up.

But it said if oil prices did hit 200 US dollars per barrel next year, consumption would turn negative and there would be only a modest improvement in 2010.

Hetal Mehta, an economist at the Ernst & Young Item Club, said: "Our predictions don't take into account the impact on public confidence that this type of oil price increase would have and how that would feed back into the economy, so we may well be underestimating the potential downside."