China slowdown continues; UK inflation eases

2012-JAN-17

Today seems to be shaping up to be a “risk on” kind of day as far as the markets are concerned, following the release of Chinese GDP data for the fourth quarter 2011. The world’s second-largest economy grew by 8.9% in comparison with the same period a year earlier, which was down from 9.1% in the third quarter, though better than the 8.7% increase economists surveyed by Bloomberg had expected. As reported by the BBC, growth for the full year was 9.2% – down from 10.3% in 2010. Thus the economic slowdown in China continues, though commodities and the stocks of commodity producers are rallying on speculation that this will prompt the People’s Bank of China into easing monetary policy. And despite S&P downgrading the eurozone’s €1 trillion bailout fund from Triple A to AA+ last night, European stock markets have also risen.

Meanwhile in the UK, the Consumer Price Index has fallen from 4.8% to 4.2%. Again, this is being interpreted as giving the Bank of England (BoE) license to engage in more quantitative easing, though inflation still remains well above the Bank’s target rate of 2%. As with the hopes for more “stimulus” in China and the constant calls on the European Central Bank to print more money, this shows the extent to which financial markets are now totally addicted to constant cash injections from central banks.

The BoE claims that CPI inflation will fall to 1.7% by the end of this year. Of course, this is the same institution that was saying two years ago that inflation would only “rise to over 3% for a while” before returning 'to target in the medium term”. As with all central banks, the BoE consistently underestimates inflation.

Moreover, the BoE’s assumption that falling energy costs will lead to disinflation seems like an extremely dubious assumption given all the sabre rattling going on between the US and Iran at the moment. War between these two countries or a revolution in Syria means a surge in oil prices, which will of course add to inflationary pressures in countries all over the world. And then there are broader oil-price trends – discussed in detail by Gregor Macdonald in an article for GoldMoney last November. As Gregor notes:

“Let’s pause here and be as frank as we can be about a rather widespread belief in the Western world shared among economists, policymakers, technologists, and corporations: The price of oil will eventually drop, and the global economy will also grow. Is that right? Well, unless you’ve been living in a cave, OECD countries are currently in the throes of a debt crisis, with at least 15% of the population unemployed or underemployed. Meanwhile, North American oil prices, as measured by the WTI benchmark, have just rejoined Brent at levels at/above $100 a barrel. And Western economies are now supposed to recover from this position? What price of oil are we to forecast, should the vast spare capacity and idle labour of the OECD come back online?”

High oil prices are here to stay.