Oil prices weigh down economic optimism

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Optimism abounds over economic prospects amid growing expectations of an upturn in capital investment.

Although industries as a whole have yet to get rid of idle capacity, the recent batch of encouraging corporate earnings reports could presage a pickup in fixed investment in the months ahead.

The improved earnings have left room for industries to gear for increased spending on plants and equipment.

Skepticism remains over such a scenario, however, as the steep runup in crude oil prices is casting a long shadow over earnings prospects.

Industries’ terms of trade, obtained by dividing the value of output by money spent on it, fell 1.8 percent year-on-year in February.

The cost of production has been rising faster than the receipt from sales, resulting in a decline in profits.

The question is how much the higher oil prices have thus far cut into earnings.

In 1999, Japanese imports of crude oil and petroleum products totaled 3.6 trillion yen, with the cost of crude oil imports alone averaging some $17 per barrel.

If the average cost of crude oil imports rises to $25 per barrel, this would translate into an increase of 1.7 trillion yen in the nation’s total annual imports of crude oil and petroleum products.

Pretax profits in the manufacturing industry totaled 11.5 trillion yen in 1999, according to official figures.

If the nation’s manufacturers cannot pass along the higher crude oil prices, they would theoretically see some 15 percent of their pretax profits evaporate.

Actually, however, the manufacturing industry chalked up a 60 percent year-on-year rise in pretax profits in the final quarter of 1999.

Manufacturers appear to be expecting a further increase in earnings in the year ahead as they have apparently succeeded in passing part of the higher cost to obtain crude oil imports on to consumers.

With signs of a strong pickup in consumer spending still nowhere in sight, however, 2 percent growth in all of fiscal 2000 appears unlikely.

Still, barring a global stock rout caused by a precipitous New York share price fall, no serious factors appear to be in the offing to undermine efforts to get the economy back on track.