05 Jun 2008

The US Housing Bust and Soaring Oil Prices: What next for the world economy?

Cecilia Frale / Daniel Gros

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Industrialised countries are currently facing a triple shock: an increase in the risk premium because of financial market stress, a fall in house prices and a deterioration in terms of trade due to higher commodity prices. The last two occasions oil prices spiked, house prices tanked and the world economy experienced a severe recession. This Commentary looks at the likelihood of extreme deviations of GDP from potential and whether the current bust in housing coupled with a spike in the oil prices will also have a strong negative impact on growth in the US and Europe.