World: Economic Forecast For 2006 Sees Growth, But Danger In Continued High Oil Prices

High oil prices eventually hurt producers, too (AFP) The respected Economist Intelligence Unit in London has issued its economic forecast for 2006. It predicts that while the economies of Azerbaijan, Georgia, Turkmenistan, and Kazakhstan should still grow very fast, the Commonwealth of Independent States as a whole would see growth slowing. Many Western economies will also see economic growth slowing, to around 1 percent.

London, 21 December 2005 (RFE/RL) -- Dafne Ter-Sakarian is an analyst with the Economist Intelligence Unit (EIU) and edited the 2006 report. She said that when oil prices get too high, oil producers suffer, too.

"It’s a sort of second-order effect. To begin with, you are producing oil and you are getting lots of money for it. But eventually, if that forces other countries, your customers, into a recession or a sharp slowdown, then nobody can buy your oil anyway. So, at that point, it’s not good," Ter-Sakarian told RFE/RL.

Ter-Sakarian said this development will fuel inflation and monetary tightening in oil-importing countries. And this could "puncture consumer confidence in the U.S. and choke growth in Western Europe," rebounding on the oil-producing countries.

Professor Andrew Oswald, an economics expert at the University of Warwick, agrees with the EIU's conclusions. "Any economist would agree that high prices are going to cause consumers to cut back, and that’s bound to be one of the effects in the market," he noted. "Historically, there is a great deal of evidence that oil-price spikes slow economic growth in modern economies, so I think it’s going to be an important adverse factor."

Oswald points out that negative effects of high oil prices on oil importers, such as unemployment, are usually delayed by a year or more. So, with high oil prices having been around for some months now, the effects will show next year.

Ter-Sakarian explained that, at the moment, the countries that buy oil have managed to absorb the price effects. But the risk is that they might not be able to, if inflation keeps rising. A lot will depend on central banks managing the situation, she said. This is why the report expects growth to be weak in countries such as Germany, Italy, Portugal, and Japan in 2006 -- at around 1 percent.

Ter-Sakarian said that most oil-producing countries, including those in the post-Soviet space, should expect high growth. For example, the EIU predicts economic growth rates of almost 9 percent in Kazakhstan, 9 percent in Turkmenistan, 10 percent in Georgia, and 25 percent in Azerbaijan, but that growth will slow.

The report is fairly critical of Russia, because it has squandered much of its growth potential, according to Ter-Sakarian. "We are seeing that the correlation between oil prices and GDP [gross domestic product] growth, which has held for many years, is now breaking down. And Russia, if it had not been for the whole Yukos affair, if it had not been for the stalling of structural reform, and if it had had better monetary management, it could have grown much faster than, in fact, it has."

Ter-Sakarian said there is "a whole web of Soviet-like arrangements" being kept alive in Russia, such as Gazprom and Unified Energy Systems. She said their wastefulness, inefficiency, and networks of unprofitable subsidiaries have a negative impact. This is part of the reason why the Commonwealth of Independent States as a whole should see growth further slowing in 2006, to less than 6 percent.

However, several oil-producing countries are keeping growth high. "The key countries are also Kazakhstan and Azerbaijan," she noted. "The China pipeline is of importance to Kazakhstan to have several export routes so that it doesn’t rely exclusively on Russia, which is the problem at the moment. And Georgia is benefiting from the Baku-Ceyhan [pipeline], so it’s still oil-related."

The EIU report also sees strong growth in Southeastern Europe, mainly in the countries of the former Yugoslavia. Matthew Shinkman, an EIU analyst for Southeastern Europe, said Bosnia-Herzegovina in particular should see growth increasing from 5.3 percent this year to just below 6 percent.

"We expect the upturn in Bosnia to be one of the strongest of the region," Shinkman told RFE/RL. "There’ve been several large foreign investments in the country recently, and we expect that to continue in 2006. Since it’s a relatively small country, coming from such a low base, that significant investment can have a fairly immediate impact in terms of employment and growth."

In contrast to most of the region, Shinkman said, economic growth in Romania will slow due to large deficits. He believes both monetary policy and fiscal policy in Romania will be growth restrictive.

The EIU's Ter-Sakarian said there are two dangerous developments to watch for in 2006, as global growth cools. First, there is a danger of China’s "investment bubble" bursting, as growth is slowed to stop the economy from overheating. That's having a negative impact on exports to China.

And then there is the looming danger of an avian-flu pandemic, which poses potentially catastrophic economic effects.