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Posted on: Thursday, June 30, 2005

Recession feared if prices don't recede

By Kelly Olsen
Associated Press

SEOUL, South Korea — Surging oil prices could curb Asia's economies, with some analysts predicting the fast-growing region — heavily dependent on oil imports — could slip into a recession if prices don't recede.

A worker fills up a gas tank in Seoul yesterday. South Korea said higher crude prices could hurt economic growth and raise consumer prices. Other Asian nations, which rely heavily on oil imports, also worry about slipping into a recession if prices remain high.

Ahn Young-Joon • Associated Press

With oil prices about 50 percent higher than a year ago, the warnings are starting to mount.

South Korea's central bank said higher crude prices could shave 0.7 percentage points off economic growth this year and raise consumer prices. The Philippines has warned of a "heavy toll." Officials in Japan, the world's No. 1 oil importer, and Malaysia are voicing concerns.

"High oil prices are already weighing on growth in Asian economies," Andy Xie, economist at Morgan Stanley in Hong Kong, wrote in a report this week. "If oil prices do not recede, Asia could slide into recession in the short term."

After rising to a record close of $60.54 a barrel on Monday, crude oil prices fell back some, granting the region's importers a reprieve. In Asian trading yesterday, light, sweet crude for August delivery was down a cent at $58.19 a barrel on the New York Mercantile Exchange, but traders said prices could easily test the $60 mark again.

Asia's heavy reliance on oil imports, mostly from the Middle East, means higher crude prices quickly translate into higher costs for a wide range of companies, from airlines and steelmakers to computer makers and fisheries. Consumers will also have to divert more of their spending to cover higher utility and gasoline bills. The overall effect could seriously restrain economic growth.

Also, Asian oil consumers have had to pay slightly higher prices because there is less competition among suppliers than in other parts of the world. This so-called "Asian premium" can run as high as $1.50 a barrel.

But the region's economic diversity — ranging from industrial behemoths like Japan, South Korea and China to smaller economies like Singapore and Hong Kong and advanced consumer societies like Australia — means the oil price impact can vary substantially.

Officials in Malaysia, where dozens of electronics companies have factories, are worried that high fuel prices could slow gross domestic product growth to 5 percent to 6 percent this year from 7.1 percent last year.

Likewise, growth in South Korea, home to a booming tech sector, could decline from its previous projection of 4 percent this year, the Bank of Korea warned Tuesday.

Philippine President Gloria Macapagal Arroyo said the oil spike threatens "to take a heavy toll on the entire nation."

While those economic projections are far from suggesting a recession, economist Xie warns that the impact of higher Dubai crude, an Asian benchmark, can already be seen in Thailand and South Korea.

Thai Prime Minister Thaksin Shinawatra on Monday said that "GDP will definitely be affected by the oil price rise."

Export-dependent Singapore and Japan appear to be more concerned about the fallout from a global slowdown triggered by higher energy costs. Singaporean officials predict economic growth of between 3 percent to 5 percent this year, down sharply from nearly 8.5 percent in 2004.