Britain heading for deflation?
Admittedly, some of the downward impact on producers’ input prices from the 27 per cent fall in the oil price in November was to have been offset by the seven per cent drop in sterling. Nonetheless, input prices are still likely to have fallen by around 4.5 per cent. This would push input price inflation down from October’s 13.8 per cent to 4.8 per cent – well below June’s peak of 34 per cent.
What’s more, the further deterioration in activity suggests that producers will have continued to pass on lower costs by cutting their selling prices. A one per cent monthly fall in output prices – the same as in October – would send the annual growth rate down from 6.8 per cent to 4.9 per cent. And a 0.5 per cent drop in core prices would push core price inflation down from 4.9 per cent to 4.3 per cent. What’s more, the latest drop in the survey measures suggest that a further easing in price pressures is in the pipeline.
Meanwhile, the trade deficit is expected to narrow further in November, after falling to £7.5bn in October. Capital Economist Ltd., a London based research firm has pencilled in a deficit of £7.2bn in the trade in goods deficit. But this will not be a sign that the 20 per cent fall in the pound since July last year is starting to boost the UK’s exports. Instead, it will be driven by a further reduction in the value of the UK’s net oil imports due to the fall in the oil price. At the same time, the weakening in overseas activity will have hurt the UK’s non-oil exports, despite the lower pound.
If the latest relevant surveys are anything to go by, industrial production will continue to fall sharply in the coming months. The output, therefore, was expected to fall by around a monthly one per cent in November, slightly larger than October’s 0.8 per cent drop. In fact, the 36 per cent drop in new car registrations in the year to November suggests that output may fall by even more than this.
The other highlights include the Bank of England’s measure of the public’s inflation expectations for November. These will surely plunge; the only question is how far.
Expectations for inflation for the coming year rose to record highs in August. But a lot has changed since then. Actual inflation has fallen sharply, retailers have slashed prices by between 20 per cent and 25 per cent in the run up to Christmas and the UK has entered its first recession in 16 years. This has all led to sharp drops in the other measures of inflation expectations. Based on these, some economists think that the Bank of England’s measure of the public’s inflation expectations for the next 12 months could fall to about two per cent. But it is likely to fall further thereafter as deflation becomes more likely.
The interest rates are expected to be cut to one per cent as early as February or March of next year. A key risk now is that the speed with which the economy is contracting prompts the banks to become even more cautious about extending credit. Although some banks early this month announced measures to help small businesses, credit is unlikely to start flowing again until we see much broader measures which will also help to reinvigorate mortgage lending and lending to big firms.
Despite the collapse of the world oil prices, major consumers like the US, Britain, Europe and China continue to seem to be on guard. They know the deepening recession in the developed world had driven the oil prices almost to the bottom. They also know that once their economies get back into business the earlier prediction of International Energey Agency that by the next decade the oil prices would rebound and go beyond $200 a barrel may come true.
That is perhaps the reason that these countries have not stopped spending on developing alternative sources of energy like solar, wind and bio-fuel.
According a report published in the Economist (Dec.5) the latest machines generating wind power have a capacity of 1.5-2.5 megawatts, or 30 to 50 times that of early ones. The same report said that Denmark is already producing 20 per cent of its electricity from wind power while Spain is producing 10 per cent and Germany seven per cent. The US generates as much as 17 gigaswatts (GW) of electricity from wind power while China is said to have doubled its wind power capacity since 2004. And globally wind power installations are expected to triple from 94GW at the end of 2007 to nearly 290GW in 2012.
Meanwhile, the world wide recession has not only affected the oil prices but has also forced down prices of most crucial commodities and raw materials to historially record lows.
Brent retreated below the $40 a barrel level for the first time since January 2005, touching a low of $39.50. ICE January Brent later traded $2.54 lower at $39.74 a barrel, down 25.7 per cent last week.
Merrill Lynch warned that oil could fall to $25 a barrel next year if the global recession affected China.
On Saterday (December7) Financial Times reported that Copper prices sank to a low of $3,000 a tonne before recovering slightly to $3,060, down 6.4 per cent on the day and 15.5 per cent over the last week.
Aluminium was unable to hold the $1,500 a tonne level, sliding six per cent to $1,490, down 15.9 per cent last week, under pressure from rising stock levels which have reached a 14-year high as demand from the construction and carmaker sectors has weakened.
Lead failed to hold the $1,000 a tonne level, down one per cent at $960 and dropping 12.7 per cent last week.
Gold fell 2.8 per cent to $744 a troy ounce, down 8.8 per cent last week, under pressure from the sharp fall in oil prices and resilience of the dollar, which shrugged off weak US economic data.