21st June 2012
Today has opened with the theme being slowing economic growth across much of the developed world. However before I address the details I wish to present something more hopeful. That has been the recent fall in the price of crude oil which is very welcome to all apart from the main oil producing nations. Having started this week near to US $100 per barrel the Brent Crude Oil benchmark has fallen below US $92 this morning. This represents a considerable reduction on the highs of the spring and since the beginning of April it has now fallen some US $ 31.54 or just under 26%. In fact we now see an oil price back at levels not seen since late 2010.
What is the impact of this?
There are three main effects from this. First a falling oil price offers a stimulus to the world economy as the positive effect on the oil importing nations exceeds the negative effect on the oil exporting nations. Secondly we see a reduction in cost push or commodity driven inflation. And thirdly we see a reduced transfer of income and wealth from the oil importing nations to the oil exporting ones.
There are specifics which also come to mind. For example India's trade deficit problems were exacerbated by the high price of crude oil and a lower price is sustained will help considerably in this regard. The UK has suffered from consumer inflation which has been persistently over target even in an economic downturn and a lower oil price will help dampen this. We saw the beginnings of this impact earlier this week as CPI fell to 2.8%.
The weaker Euro area nations may be particularly helped as reduced expenditure on oil and fuel is most welcome in countries where the budgets are most strained. So it may be a honeymoon gift of sorts for the new Greek government for example. Let us hope so as it will certainly need all the (economic) help it can get.
Food for Thought
Those who believe that expansionary monetary policies such as Quantitative Easing contributed to the rising oil price will have had some grist to their mill yesterday evening. On a day that the US Federal Reserve did not announce what would have become called QE3 the oil price fell by more than 3%. It is not proof- correlation does not prove causation- and there were also weak oil inventory numbers to allow for too but it did take place.
The US Economy is weaker according to the Federal Reserve
The opening salvo in a barrage of poor economic news came from the economic forecasts of the US Federal Open Markets Committee. Let us look at its view on its main concern:
"However, growth in employment has slowed in recent months, and the unemployment rate remains elevated……..Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate."
The first sentence we already knew but the second will have come as something of a shock to organisations who have taken the US recovery as a fact set in stone such as the BBC. Accompanying this came a reduction in the economic growth forecast for 2012 by 0.5%. If we move on from the specific numbers which I believe are as influenced by presentational factors as economic ones and translate the central bank language we see that it is worried by the apparent slow down in the US economy. So far we have only seen a reduction in the rate of growth but the fear must be of growth grinding to a halt.
Here we have received data overnight from the HSBC purchasing managers index which yet again indicates a slowdown in her manufacturing sector:
"Flash China Manufacturing PMITM at 48.1 (48.4 in May). 7-month low."
Ordinarily a number below 50 in such a series indicates an outright contraction whereas in China so far it appears to indicate a reduction in her growth rate. However the detail of this report was poor too as the only factor to expand was inventories of finished goods which has obvious implications for future production.
The Euro zone
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