Economists predict high oil prices, inflation and lower dollar

The bank has been consistently more negative on the outlook for the US economy than the forecast consensus for sometime, and largely proven correct. It is therefore not so surprising to see a more negative view from Standard Chartered in its latest forecasts.

Oil prices will average $104 a barrel this year and not dip much below $100 while for 2009 the average price will be $120 with a risk of $150, according to the bank's economic department.

Higher inflation is therefore likely to be a worldwide phenomenon, and be particularly strong in the Middle East. The bank's economists see no escape from spiraling food and accommodation costs, and strongly negative real interest rates which will push regional house prices higher again.

Mixed commodities

However, for commodity prices in general the picture has become more mixed with nickel and zinc prices down by around half from their peaks. Metals Analyst Daniel Smith said a weaker trend in aluminum prices was also likely this year and next.

On food prices he predicted that a 2008/09 bumper wheat crop in the US might ease the present supply position, and rice prices moderate. But the team warned that protectionist measures like export controls and hoarding such as Oman's recent purchase of a two-year supply of rice would slow the recovery of markets.

Further US dollar weakness is also likely to keep commodity prices high as they are priced in dollars. Standard Chartered is very bearish on the outlook for the greenback and sees US interest rates falling to 1% this autumn and the US dollar falling to $1.75 to the euro by the end of 2009.

Gold

As the US currency moves in inverse relationship to gold, Smith is very optimistic about the future for the yellow metal. He thinks markets are too optimistic about the US dollar at present and too negative on gold which should recover to above $1,000 later this year and hit $1,200 in 2009.

This could be a repeat of the 1970s. Then inflation started with an oil price surge and real estate price boom which collapsed. Higher general inflation followed and oil prices surged again and gold was the last commodity class to peak out in 1980 before a 20 year bear market for commodities.

History never exactly repeats itself. But there are many parallels that can be drawn between the decade of the 1970s and the 2000s. The 1970s ended with a nasty deflationary recession and a slump in the oil price.

However, the prognosis of the Standard Chartered team would suggest that is two to three years away, and whether the global economy could handle such medicine in its over-borrowed present condition is debatable.

See also:
Has the gold price already passed its bottom?
Global slump hits UAE launches