Archive for May, 2009
Friday, May 29th, 2009
According to the Organisation of Petroleum Exporting Countries (OPEC) the answer is “yes”. After prices fell last year from $150 a barrel to $30 a barrel, there has been a recovery. Yesterday, oil prices rose above $65 a barrel and the secretary-general of OPEC said that “We are beginning to see light at the end of the tunnel.” The organisation said that it saw demand picking up, particularly in China, India and Asia in general, and expected that a global recovery would push oil prices into the range of $75-80 a barrel.
The recent movement in prices can be seen in the graphic below.
OPEC has made three major cuts in output since September 2008 which amounted to about 5% of global oil demand, but over the last month or so there has been a slight upturn in production. Since oil is a derived demand any projected increase is seen as a sign that the global economy is getting back on its feet. Recent OPEC oil production can be seen in the chart below.
However, the International Energy Agency (IEA) published a major oil market report on 14th May and in it they noted that oil prices had strengthened saying: “Oil futures have moved higher in tandem with stronger global financial markets. Yet, new bullish macroeconomic sentiment has not yet produced signs of oil demand recovery and oil market fundamentals remain weak.”
In fact the IEA has revised down its forecast for global oil demand this year by 0.2m barrels/day and now predicts a total oil demand of 83.2 mb/d, which is 3.0% below the total for 2008.
Is OPEC just talking the market up? Will they be able to control production sufficiently to push up prices further? The sensible argument would say that it is just too early to call, and that although there are signs of some global upturn, with India just announcing a 5.8% increase in GDP in the first quarter of 2009, it is probably from the East that we should look for the first green shoots of recovery.
Tags: India, oil demand, oil prices, oil production, OPEC
Posted in International, OPEC, Oil | No Comments »
Thursday, May 28th, 2009
Yesterday the pound strengthened to $1.60 for the first time since November last year. This follows the pound sinking to $1.36 in January, which was the lowest level for over twenty years.
Why did sterling rise? The dollar is normally seen as a sanctuary in times of global turmoil but there has been some sentiment in the markets that the UK economy has come through the worst of the downturn. This has made some investors move out of dollars and into sterling.
However, there may be a limit on sterling rising much further, due to the continuing need to finance record levels of government borrowing, especially as April’s borrowing reached a record of £8.5bn.
 The pound has been appreciating against the dollar
Philip Manduca, who is Head of Investment for the ECU group, said that: “I can’t find anyone who truly believes that there are not more problems ahead in the UK. Increasing government debt can only lead to higher taxes and a subdued economy for years to come, which does not make for a prosperous future. How is the UK Government going to finance itself?”
The uncertainties regarding higher government borrowing, the printing of money by the Bank of England and the possible inflationary consequences, are likely to keep sterling relatively depressed in the months ahead. A higher sterling exchange rate will make imports cheaper but a lower rate will boost our exports.
Tags: dollar, government borrowing, Inflation, pound, sterling
Posted in Bank of England, Exchange Rates, government borrowing, sterling | No Comments »
Wednesday, May 27th, 2009
I was on the phone to a friend in South Africa last night who works in the construction industry. He told me that sales made by his company were down 25% this year, and they were giving up any wage increases in order to save jobs. This was backed up by the news released yesterday that the South African economy has gone into recession for the first time since 1992. This follows two consecutive quarters of economic downturn. In the final three months of 2008 the economy contracted at a year-on-year rate of 1.8%, but this was followed by a fall in GDP of 6.4% in the first quarter of 2009 on an annualised basis.
Interest rates have been reduced from 12% in December to 8.5% currently, although it is expected that they will be reduced further today by the Reserve Bank of South Africa. The biggest downturns have been in mining and manufacturing and there has been a positive impact on construction in some regions due to the capital spending on the World Cup tournament which comes to South Africa next year. The government expects another quarter of negative growth before the economy picks up again.
Also, yesterday, it was reported that the Russian economy fell by 10.5% in April compared to the same month last year. Russia has been particularly hit by the halving in the price of oil, which is one of its major exports, as well as a general slowdown in industrial output.
Finally, in the US, it was announced that house prices fell by a record 19.1% in the first quarter of this year. One national index shows that home prices have fallen by 32.2% since their peak in the second quarter of 2006.
The only good news I can find at the moment is that Japan has experienced a trade surplus for the past three months, although this has largely been due to import values falling even faster than exports. Having said that, the rate of fall in exports is now declining and there is a cautious optimism that the worst is over.
Tags: GDP, Housing, Japan, recession, Russia, South Africa, US
Posted in GDP, Housing, Japan, US economy, recession | No Comments »
Tuesday, May 26th, 2009
In figures just released, the OECD, which covers 30 advanced nations worldwide, has reported that Gross Domestic Product fell by a record 2.1% in the first quarter of 2009 amongst its member countries.
This amounts to the largest fall since records began in 1960 and compares with a fall of 2.0% in GDP in the previous quarter. Of the major seven countries, which include UK, US, Japan, Canada, Germany, France and Italy only France performed better in the most recent quarter than the previous quarter, with a fall in GDP of 1.2%. (Figures for Canadian GDP are not currently available).
In the US GDP fell by 1.6% in the first quarter and thus performed better than the average, as did the UK where the fall was 1.9%. Japan and Germany experienced the biggest falls due to the severe cutback in world demand for their exports.
The chart below shows the quarterly GDP volume growth when measured by the percentage change on the same quarter of the previous year. This shows a total fall of 4.2% for the OECD area between the first quarter of 2009 and the same quarter a year earlier. Again, the US, UK and France all experienced lower falls in GDP than the average.
It would appear that the strong action to mount immediate fiscal boosts in the UK and the US has helped to reduce the impact on their GDP.
Tags: GDP, OECD
Posted in GDP, OECD | No Comments »
Friday, May 22nd, 2009
A study by the Bank of England entitled “Trends in Lending” has just been published. This shows that net lending to businesses has remained weak. The official data covers lending by all banks and building societies and shows that the monthly flow of net lending in March 2009 was “subdued, though positive.” When looking at the three month annualised growth rate in Table 1A below, it can be seen that there is a marginal upward trend from 2.1% in January, to 2.2% in February, and reaching 2.6% in March. However, by contrast, the comparable figures for 2007 and 2008 were 19.4% and 10.8%. The 12 month growth rates shows a steady deterioration from 8.1% in January to 4.1% in March.
Lending Panel data, which is less reliable, shows in Chart 1.1 that the value of gross new corporate loan facilities provided by the major UK lenders fell in April after increasing in March. It also shows that gross new lending was more than offset by loan facilities which were removed or reduced.
 Source: Bank of England
Much of the reduced lending has been due to the depressed state of a number of sectors of the economy. A major contribution to the fall in the annual growth rate of lending has been due to the cutbacks in the commercial real estate sector, responding to the fall in the housing market. But wholesale and retail trade and manufacturing have also seen sharp falls in lending over the past year.
 Lending to the commercial real estate sector has been depressed
One positive note is that there has been more movement in the capital markets in recent months and some large companies have been able to raise more money through issuing new equity. On the one hand, this reduces the need for more expensive bank borrowing, but there is evidence that some of this new money has been used to pay off existing debts to the banking sector.
It is also noted that there have been sharp increases in fees and interest rate spreads for companies trying to raise fresh capital or to extend existing bank facilities. This is obviously going to make borrowing less desirable but for many companies they have no choice but to accept the banks’ terms or go under. This is particularly true of small and medium sized enterprises (SMEs). The recent picture shows that fewer SMEs are attempting to borrow money. On top of this, approvals of new borrowing considered as a ratio to applications, have fallen for smaller businesses.
This means that the banks are tightening up their lending criteria as they review their credit risks, with the effect that the flow of new loans has been considerably lower than in the same months of 2007. Not surprisingly, the use of overdrafts was higher in 2009 than two years previously, as firms became desperate to cover falls in cash flow. This, of course, is a relatively expensive way of borrowing, but perhaps the only outlet for many small companies.
Tags: Bank lending, UK business
Posted in Banking, Manufacturing, Retailing, UK industry | No Comments »
Thursday, May 21st, 2009
Japan, which is the second largest economy in the world, shrank by 4% in the first quarter of 2009. This fall in GDP was the fastest since records began, and represented a 15.2% drop when compared to the same period a year earlier. This was also the fourth successive quarter of decline, and followed a fall of 3.8% in the last three months of 2008.
Japan’s economy has long been structured on the need to sell their goods overseas. However, their car companies have been particularly hit by the global recession in consumer demand as also have their electronics firms. In fact Sony has just announced its first annual loss for 14 years and is making swingeing cuts in the number of suppliers it uses in order to reduce costs, and has also cut back on employment. In the first quarter of this year there was a huge fall of 26% in Japanese exports. The economy has also had to deal with a rise in the value of the Yen, which now looks overvalued, and is contributing to the difficulty in selling abroad.
The Japanese prime minister, Taro Aso, raised concerns in parliament that: “Weakness in the corporate sector is gradually spreading to households … This is a very serious situation, so we need to respond appropriately.”
These comments were based on the fall in consumer spending of 1.1% during the first quarter of this year added to a decline in investment in plant and equipment of 10.4% over the same period. Part of the reason for this is that the Japanese savings rate, which has always been at relatively high levels historically, has gone up and the subsequent decline in spending has served to worsen the current situation. Japanese firms have traditionally been reluctant to cut jobs, but have been laying workers off over recent months. This has in turn created a feeling of lack of job security, and workers have responded to this insecurity by saving more and spending less.
Some commentators feel that Japan is now through the worst, and there is a general expectation that the economy will shrink by about 6% in total this year, although the IMF has reconfirmed that it expects a 6.25% contraction.
Tags: consumer spending, exports, GDP, Japan, recession
Posted in Consumer Expenditure, GDP, Japan, recession | 1 Comment »
Wednesday, May 20th, 2009
In April 2009 the Retail Prices Index (RPI) fell from -0.4% in March to -1.2% in April. This was the biggest fall in prices since records began in 1948. The recent fall into negative territory for the RPI has been due to the huge cut in interest rates over recent months, as the Bank of England has reduced rates from 5.0% to 0.5%. This has brought down mortgage interest rates which is a cost included in the RPI. This rate is still of significance because it is used by many employers for wage bargaining purposes and will serve as a constraint on the growth in average earnings.
The measure which the Bank of England targets at 2% is the Consumer Prices Index (CPI) and this also fell at a faster rate than economists were forecasting in April. It fell from 2.9% in March to 2.3% in April, although this is still higher than the 0.6% recorded in the eurozone and most other major developed economies. The recent changes in the UK inflation rates can be seen in the graphic below.
 Source: ONS
The CPI declined due to falling gas and electricity bills and some cheaper food costs. However, food prices are still rising at a rate of 9.2% which is hitting pensioners and others on low incomes particularly hard. Core inflation, which strips out volatile elements such as energy prices and food, fell to 1.5% in April from 1.7% in March.
Why is UK CPI inflation still stuck above that of most other advanced countries? The main reason is the fact that sterling has depreciated by 25% since the middle of 2007, which has pushed up the prices we pay for imported goods. Around one-third of the goods used to measure the CPI are imported.
On balance, the Bank of England expects inflation to continue to fall and to be around 1% in a further two years time. Sterling appreciated slightly yesterday, and this coupled with increased unemployment fostering lower demand, will combine to keep inflation down.
Economists are divided over the future. Some think that inflation will continue to fall and that we might slip into a deflationary spiral as has affected Japan over the past twenty years. However, some others believe UK CPI inflation will remain stubbornly higher and that the Bank may have to increase interest rates sometime next year.
Tags: CPI, Deflation, food price inflation, Inflation, RPI, sterling
Posted in Deflation, Inflation, Interest rates, sterling | No Comments »
Tuesday, May 19th, 2009
For those of you who are keeping up with environmental issues, the World Bank has just published its “Little Green Data Book 2009”. This latest edition points out that the world’s cities are the main drivers of global warming because most economic activity takes place in urban areas. Since cities have become hubs of relative affluence, their greenhouse gas emissions have risen. This has been one of the reasons that developed countries have produced more greenhouse gases than developing countries.
However, the World Bank notes that this level of economic activity is spreading as urbanisation is spreading throughout the world, and it is estimated that by 2050 no less than 70% of the world’s population will live in cities. Unless there is a change in the use of energy greenhouse gases will rise significantly, as cities obtain about 72% of their energy from coal, oil and natural gas. On the other hand cities are the main users of renewable energy but this is still from a very small base. One interesting point is that where populations are living in more dense city centres they are producing, on average, 30-50% less greenhouse gas emissions that those living in outlying suburbs.
The World Bank also notes that the increasing urbanisation which is will be continuing in India and China in the coming years will result in an increase in emissions of carbon dioxide, although their per capita levels will be lower than those of developed countries. Also, lessons will be able to be learned from the successes of countries such as Germany and Sweden which have made dramatic reductions in their emissions over the last 40 years.
The Bank has also warned that 360 million people live in low-elevation coastal zones, making them exposed to potential rises in the sea level. This can be seen in the graphic below.
It is noted that scientists have estimated that sea levels rose by 0.17 meters during the 20th century and could rise by a further 1 meter during this century, especially if there is a major melting of the Antarctic ice sheet. If this happens it will be far more difficult for developing countries to respond to the changes.
Tags: carbon dioxide, Environment, flooding, Global Warming, Greenhouse Gases, urbanisation
Posted in China, Environment, Global Warming, Greenhouse Gases | 1 Comment »
Monday, May 18th, 2009
GDP fell by 2.5% in both the euro area and the whole of the EU27 during the first quarter of 2009, according to flash estimates produced by Eurostat, the statistical office of the European Communities. In the final quarter of 2008 growth rates were -1.6% in the euro area and -1.5% in the EU27.
When we compare the first quarter of 2009 with the same quarter in the previous year, GDP decreased by 4.6% in the euro area and by 4.4% in the EU as a whole. These figures were somewhat surprising as analysts had been predicting a fall of only about 2.0% in the eurozone area. However, a continuing sharp fall in German export sales led to a fall in German GDP of 3.8% in the first quarter, and a fall of 6.9% year-on-year.
A consequence of this is that Germany will suffer its biggest post war budget deficit this year as tax revenues continue to fall at an alarming rate. In fact, the German finance minister has just stated that the federal deficit will be above €50bn this year and will rise to €90bn next year. This compares with a federal deficit in 2008 of only €11.9bn. Germany expects its economy to shrink by 6% this year which will be the largest fall since the Great Depression in the 1930s.
The Baltic States are being particularly badly hit by the credit crisis. Eurostat statistics show that GDP in Estonia fell by 6.5% in the first quarter of 2009 (giving a year-on-year fall of 15.6%) whilst Lithuania fell by 9.5% (10.9%) and Latvia decreased by 11.2% (18.6%).
Amongst the other major EU countries France saw its GDP fall by only 1.2% in the first quarter, with Italy recording a fall of 2.4%. By contrast the UK declined by 1.9%.
Tags: EU, GDP, recession
Posted in European Union, GDP, eurozone, recession | No Comments »
Friday, May 15th, 2009
I have adapted the following from an email which I recently received. You might like to add your comments as to what is going on in the scenario below:
It is August in a small town on the South Coast of France. Holiday season is in full swing, but it is raining so there is not too much business happening.
Everyone is heavily in debt.
Luckily, a rich Russian tourist arrives in the foyer of the small local hotel.
He asks for a room and puts a Euro100 note on the reception counter, takes a key and goes to inspect the room located up the stairs on the third floor.
The hotel owner takes the banknote hurriedly and rushes to his meat supplier to whom he owes €100.
The butcher takes the money and races to his supplier to pay his debt.
The wholesaler rushes to the farmer to pay €100 for pigs he purchased some time ago.
The farmer triumphantly gives the €100 note to his employee to cover his back wages.
The employee goes quickly to the hotel to settle his bar bill. He places the €100 note on the counter.
At that moment, the rich Russian is coming down to reception and informs the hotel owner that the proposed room is unsatisfactory and takes his €100 back and departs.
There was no profit or income.
But everyone no longer has any debt and the small townspeople look optimistically towards their future.
Tags: global crisis
Posted in Money Supply | No Comments »
|
