A new era of globalisation?

I was chatting to my good friend and contact Paul Hodges of International eChem yesterday.He believes we’ve entered globalisation part II, where the impact of higher raw material prices will trigger harmful inflation.
As Ben Bernanke has pointed out, oil prices are 40% higher than would otherwise have been the case without the recent boom in Chinese demand.
The upside of China’s export boom has been staggeringly cheap prices of everything from low-end clothing to high-end electronics. This has to some extent offset the impact of job losses as manufacturing has migrated east.
But Paul points out that raw material costs are now a much bigger portion of finished goods prices with wage costs also on the rise in China.
The west could therefore be hit by a combination of higher fuel prices and higher consumer goods prices, while it continues to grapple with the decline of its manufacturing industries.
Cheerful stuff, eh?

, ,

One Response to A new era of globalisation?

  1. Paul Hodges 17 April, 2007 at 12:07 pm #

    Further evidence of the adverse inflationary consequences of Phase 2 in the globalisation process has come today. It has been annouced that (for the first time in over 10 years) the Governor of the Bank of England has had to write an open letter to the UK Chancellor explaining what he intends to do to bring inflation back under control. UK inflation has now risen to 3.1%, whereas the UK’s monetary policy framework requires the Bank to aim for inflation of 2%. They are clearly well adrift of this target.

    Two scenarios now open up for Central Banks in the main Western economies:
    1. Keep raising interest rates by small amounts. It is most likely that the UK and other Central Banks will continue to raise interest rates by small amounts. They will announce a 0.25% increase, followed by a pause, and then announce a further small rise if inflation still seems to be stubbornly rising. A resumption of interest rate rises itself would probably come as a bit of a shock in the USA, but it is already more or less policy in Europe.
    2. What happens if this policy fails? The risk of this policy is that inflation does not come back to the 2% targets as anticipated, but continues to increase. In this case, bigger and more frequent rises in interest rates will be required next year.

    Either way, it seems a good time for companies to start paying down debt when they can, and to adjust their sales/profit forecasts in anticipation of more difficult times ahead.

Leave a Reply