Prisoners of Policy
It is now almost certain that the US economy will be in recession (two consecutive quarters of negative growth) by August. The trend will be mirrored in Europe though at a different, probably lower, intensity. Here in the UK all the recent data has pointed to declining confidence and increasing costs. CPI inflation remained over the Governments target of 2.0% due mainly to commodities and energy. Friday March 7th saw oil prices reach record levels - the Brent benchmark stood at $106.58pb. Food prices are rising globally on the back of rocketing grain costs, poor harvests in Australia and the Ukraine have been compounded by rising demand for food and the US surplus being diverted to bio-fuels. As Corporate’s face increased costs and weaker demand their ability to enhance workers pay is severely curtailed thus average earnings in the UK remain at a subdued annual rate of 3.8%. The High Street is only surviving by slashing margins – a trend that has a limited life span. In the face of such trends policy makers are faced with a real dilemma, interest rates and taxes have to fall to stimulate demand but in so doing inflation will inevitably rise. Unfortunately for us here in the UK the largess of the previous Chancellor (we can argue all day about the results) has left his successor with no room for manoeuvre just when he needs it most. Thankfully the Fed and US treasury have the ability to deliver real measures.
Looking ahead it is difficult to see when the underlying situation will improve. OPEC will not increase production even if it wanted to, it’s members need the cash for public spending more than ever. Banks with significant sub-prime asset write- downs will Hoover up whatever cash is available to buttress balance sheets ahead of the quarter reporting dates (March, June, September and December) forcing market rates higher. Even if liquidity is restored to adequate levels the major banks will remain so afraid of bad debts that lending will inevitably decline so reducing economic growth further. Whilst we are not facing the end of the economic world we all will have to get used to more realistic spending, consumption and saving levels.
16 / Mar / 2008