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By Samuel R. Avro on Jan 5, 2009 with no responses

U.K. Economic Recovery May Be Fueled By Lower Oil Prices


The Bank of England in Threadneedle Street, London.

The recent fall in the price of crude oil may spur economic growth in the United Kingdom, according to independent research conducted by the Ernst & Young ITEM Club.

Crude oil futures were recently trading below $40 a barrel after peaking at above $147 in July.

If oil were to stabilize at the $40 per barrel range, the U.K. economy would shrink by 0.3 per cent less this year and add 0.6 per cent to economic growth in 2010, the survey results showed.

“Next month’s Consumer Price Index inflation figures should show a much steeper drop, particularly on the Retail Price Index measure, as the VAT (the E.U.’s method of taxation) reduction and larger interest rate cuts feed through,” said Hetal Mehta, senior economist at the Ernst & Young Item Club. “By later in the year, RPI inflation will be in negative territory and the CPI measure will almost certainly undershoot the 1% threshold.”

However, she warned that if the price of crude drops excessively, it may lead to deflation which would then have a negative effect. “It is very possible that a further fall in the international oil price will spark deflation that will further damage a global economy that is already stumbling into 2009,” Mehta said.

The report also warned that if oil fell further, there would be considerable losses for North Sea oil ventures.

A survey conducted by the Bank of England shows that banks haven’t loosened up their credit to households and companies, intensifying worries that the government’s £500 billion ($725 billion) bank-rescue plan is failing to stimulate the economy.

Prime Minister Gordon Brown, meanwhile, has promised to create up to 100,000 jobs by spending on  hospitals, schools, infrastructure and environmental industries.