The global economy’s apparent resilience in the face of high oil prices may prove short-lived warns Fitch Ratings in a new report.

In a report released today, Fitch notes that gross domestic product growth in the G7 in 2004 and the first half of 2005 has been buttressed by earlier macroeconomic policy easing but this impulse is now turning negative, just as the drag from oil prices gains traction. If oil prices were to remain at US$70 per barrel for a sustained period, world GDP growth in 2006 could fall by around 1% compared to previous forecasts, it predicts.

At US$70 per barrel the oil price shock would be on a scale equivalent, in real terms, to those seen in 1974 and 1979, it says. While there are good reasons why the impact of an oil shock would be less severe than in the 1970s, including reduced oil intensity, enhanced macroeconomic policy credibility and greater proclivity to spend among oil exporters, it would nonetheless represent a sizeable income loss for the G7 economies, which spent nearly 2% of GDP on oil consumption in 2004, Fitch explains.

“Comparisons with the 1970s – the nadir of post-war economic performance among the advanced industrialised countries – provide cold comfort,” says Brian Coulton, senior director in Fitch’s Sovereign Group. “If oil prices stay high the headwinds facing global economic growth would gain strength while the scope for renewed macroeconomic policy accommodation would be limited.”

Sustained high oil prices could also exacerbate risks associated with global imbalances. A higher oil import bill could see the U.S. current account deficit reach US$1 trillion in 2006, 7.5% of GDP, amplifying concerns about its sustainability and the risk of increased volatility in global currencies and other asset markets.

While emerging markets are net oil exporters in aggregate and hence would benefit from an improvement in their terms of trade, sustained oil price strength would likely see growth slow, reflecting emerging markets’ more intensive use of oil and their reliance on external demand, it adds. Also, with monetary policy credibility less well entrenched in those countries than in the advanced industrialised economies, the inflationary impact of higher oil prices could be harder to manage.

“Central banks in emerging market net oil importing countries would be faced with the unenviable task of having to raise interest rates sharply in an environment of slowing economic growth in order to maintain monetary and exchange rate stability,” adds Coulton.

From a balance of payments perspective the largest negative impact would be felt in Asia, Fitch suggests, where some countries would see trade accounts deteriorate by 3% of GDP. But, on the whole, external finances in the region are robust it says.

However, a number of net oil importers in emerging Europe already running large current account deficits will also see a significant widening in trade imbalances, it points out. “Notwithstanding recent efforts in a number of countries to limit the increase in subsidy expenditures, the temptation for governments to absorb the cost of higher oil prices through fuel price subsidies would remain strong, hampering fiscal progress,” Fitch concludes.