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An oil price spike doesn’t mean a recession is on the way

21 September 2019

9:00 AM

21 September 2019

9:00 AM

An oil price surge from $60 to $72 per barrel, as happened after the drone attack on Saudi Arabia’s Abqaiq refinery caused a sudden 6 per cent cut to global supply, would once have been taken as a sure signal of economic troubles ahead.

A 1990s study of postwar oil prices plotted against employment and other data by Professor Andrew Oswald of Warwick University showed that every spike in energy costs had shortly been followed by recession. The theory still held in 2008: even though the ‘Great Recession’ was attributed to financial mayhem, it came soon after a speculative oil peak of $147.

But today’s barrel price seems to be settling back and is anyway little more than half what it was earlier in this decade — while the developed world is far more energy-efficient, in factories, offices, homes and transport, than it was in the era of Oswald’s study. A seriously disruptive Middle East conflict would dent global growth but is far from the UK’s most crucial worry, which is the still-rising risk of a no-deal Brexit. And even that seems to have been taken in our stride, at least in July when the economy recorded 0.3 per cent growth after a 0.2 per cent contraction for the second quarter; if the result for the whole third quarter is zero or positive, we’re not in recession — yet.

Don’t let’s be complacent, however, because the aftermath of the Abqaiq attack highlights another risk: a significant blip in inflation. We rely on imported fuel and distributors are always swift to pass wholesale cost rises to consumers; meanwhile, Operation Yellowhammer’s ‘reasonable worst case’ tells us that traffic disruption (particularly at the Dartford Crossing) plus ‘consumer behaviour’ could lead to local fuel shortages that will inflate prices. The report also predicts that ‘certain types of fresh food’ and ‘key input ingredients’ will be in short supply, increasing prices and disproportionately affecting low-income groups in the pre-Christmas period. Add to all that the wider inflationary impacts of a continuing weak pound and of any monetary interventions from the Bank of England designed for stimulus.

So yes, the economy may muddle through this turbulent autumn and ride out what’s just happened in the oil market; miraculously it may even go on creating new jobs. But you can be sure that we’ll feel the pain in our pockets.

Wrong deal, wrong time

Every foreign bid for a major British company is spun as an expression of confidence in our economic future and evidence of the openness that has always enabled us to punch above our weight as a global mercantile and financial power. But I’m not sensing much enthusiasm for the idea of the London Stock Exchange (LSE) being taken over by Hong Kong Exchanges and Clearing, which has tabled an unsolicited £32 billion merger approach that may turn hostile.

HKEX (which already owns the London Metal Exchange) says it wants to create ‘a world-leading market infrastructure group’ while reinforcing its own position as the key capital-markets conduit to mainland China. The LSE, having ended a merger flirtation with Germany’s Deutsche Börse in 2017 and endured a period of internal boardroom strife, looks like a diminished institution in need of new energy and new partnerships as well as post-Brexit clarity. It is currently trying to buy Refinitiv, a market data supplier spun out of Reuters, but that deal would die if HKEX’s prevails.

LSE chairman Don Robert’s response to his Hong Kong counterpart Laura Cha has so far been one of blunt rejection. And not even China’s state-controlled media seem to think the proposed tie-up makes sense, despite the fact that half of HKEX’s board are Hong Kong government appointees. The implication seems to be that Beijing would prefer to see Shanghai’s stock exchange (with which the LSE already has links) grow in importance while Hong Kong is brought politically to heel. So it’s a matter of wrong deal, wrong time, in every respect.

Capital philanthropy

I’m in awe of an entrepreneur I had never heard of until he died last month, aged 95. Sir Michael Uren was a hands-on engineer who spent half a century building and running Civil & Marine, which dredged aggregates from the sea bed and recycled blast-furnace slag into concrete. If that sounds bad for the planet, it was rather the opposite: saving agricultural land from quarrying and using far less energy to make concrete than conventional methods. After he sold the business to Hanson for £245 million in 2006, Uren decided (at 83) that he didn’t really need the cash. So he gave much of it to good causes, at the rate of £19,000 a day for the last 13 years of his life. That included £40 million to Imperial College London for a biomedical engineering research centre which he envisioned as ‘a new Silicon Valley’ to nurture great bioscience companies of the future. Could there a finer parable of the positive cycle of capitalism?

Move over, Fred Goodwin

This week’s restaurant tip is the Register Club at the Edinburgh Grand Hotel, where I met a lively bunch of Scottish finalists for our Economic Disruptor awards — and sensed an uncomfortable ghostly presence. ‘Is this by any chance the former headquarters of Royal Bank of Scotland before it moved to chief executive Fred Goodwin’s extravagant new Gogarburn campus out by the airport, symbolic of all the bad decisions that brought his bank to the edge of ruin in 2008?’ I asked a puzzled waiter. He called the maître d’, who confirmed my guess and even produced an old RBS floorplan: the room in which we were lunching had actually been Fred’s office. So there’s another remarkable recycling: the space where plans were hatched that almost took down the entire financial system alongside RBS, turned into a space for entrepreneurs to pitch disruptive technology ideas over a perfect smoked haddock risotto.

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