April 12, 2010 3:00 am

Oil price increase ‘less bad for UK’

A permanent rise in the oil price would leave the UK economy in better shape than other importers such as the eurozone, Japan and the US.

All large oil-importing economies would suffer from a higher oil price, but some would suffer more than others. A study by PwC, the professional services group, shows Japan and the US would be hardest hit: a $10 price rise would shrink their economies permanently by 0.75 per cent, with most of the effect felt within five years.

Countries using the euro would experience a 0.6 per cent contraction, while the UK would withstand the shock relatively well, shrinking just 0.4 per cent. The Chinese and Indian economies, by contrast, are forecast to contract sharply but recover well, clawing back most of the lost growth by 2020.

Rallying oil prices prompted the research. Brent crude oil has risen by about $15 since the start of February.

“The international economic recovery, and in particular the relatively rapid resumption of strong economic growth in developing countries like China whose oil consumption is relatively robust, has put upward pressure on oil prices in recent months,” said Yael Selfin, head of PwC macro consulting, who conducted the research.

Reasons for the relative protection of the UK economy are threefold.

First, a shrinking manufacturing base means lower demand for oil.

Second, the country's oil producers benefit from price rises, which offsets some of the loss.

Finally, faith in the Bank of England’s inflation target damps reaction from companies and consumers.

Ms Selfin said oil production was a smaller part of the US economy, so the benefit from rising prices was smaller. The eurozone fared less well, she said, as its economies were more rigid.

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