Nicky Burridge

High oil prices could "snuff out" any recovery in the UK economy during the coming two years, economists warned today.

The Ernst & Young Item Club said the modest upswing in economic growth it was predicting for 2009 and 2010 was predicated on the price of oil remaining below $100 per barrel.

But it warned that if oil rose to $120 per barrel or $150 per barrel in the long-term, it would have serious implications for the strength of the wider economy. It added that if the cost hit $200 per barrel, as one Opec minister recently predicted, then "all bets may well be off".

In trading yesterday, oil jumped more than $3 to strike a record over $120 a barrel on the weaker dollar and supply concerns from Opec members Nigeria and Iran. US crude had surged to $120.36, before settling at $119.97 a barrel. London Brent crude rose $3.43 to $117.99 in light trade due to the UK bank holiday.

The E&Y group said if oil prices climbed to $150 per barrel it would trim its forecast for economic growth for 2009 from its current prediction of 1.5% to a weak 1.1%.

It said the following year, when many commentators had pencilled in a strong recovery in GDP growth to 2.7%, high oil prices could dampen growth to less than 2%.

A long-term price of $200 per barrel for oil would cut economic growth even further to just 0.9% for 2009 and 1.2% in 2010.

It warned that such high oil prices would have an impact across the whole economy, adding that one of the main factors driving the predicted recovery in 2010 was increased consumption as high street spending picked up.

But it said that if oil prices did hit $200 per barrel next year, consumption would turn negative and there would be only a modest improvement in 2010.

Hetal Mehta, an economist at the Ernst & Young Item Club, said: "Our predictions don't take into account the impact on public confidence that this type of oil price increase would have and how that would feed back into the economy, so we may well be underestimating the potential downside."

Oil prices have risen by around 400% during the past seven years and by 25% in the first four months of 2008 alone.

The group said it was not unreasonable to assume they could continue to rise, even at more moderate rates, over the coming few years.