Oil price slump could lift economy

6 January 2009

06 January 2009 | Jake Kanter

Low oil prices could provide a "substantial" boost for the UK economy over the next three years, according to research by the Ernst & Young ITEM Club.

The economic forecaster found that if world oil prices remain about $40 (£27) a barrel, the UK's GDP could increase by as much as 0.7 per cent by 2011. Lower oil prices will translate into lower production costs for businesses and lead to higher output. Manufacturing would increase by 0.5 per cent next year and 1 per cent in 2010.

Hetal Mehta, senior economist at the group, said consumer goods prices would fall as a result of lower production costs.

The price of oil recorded $49.60 (£33) a barrel yesterday on the NYMEX - around $100 (£68) cheaper than the record highs during summer 2008. Last month Opec made a record cut in production to tackle over-supply in the market and bring more stability to prices (Web news, 19 December 2008).

If prices fall as low as $20 (£13) a barrel, manufacturing activity could be boosted by as much as 1.4 per cent over the next two years. The forecast warned that if a lack of demand causes the price to decrease to this level, it could spark deflation in the UK economy.



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