Sunday, August 10, 2003

Things don't look so peachy in the UK, either.

First, The Independent says the Bank of England will report this week
that Britain's economic growth may reach only 1.8 per cent this year instead of 2.3 per cent. The Treasury's official forecast is still a relatively buoyant 2.25 per cent.

In the first half of this year, the economy has grown by only 0.4 per cent, so the latest projection will still require a rapid acceleration for the rest of 2003. The first three months were the worst since the 1992 recession and the second three months grew at half the rate predicted by the Bank in its May inflation report.
Combine that with the analysis of the Financial Times that
for UK manufacturers input prices have been rising faster year-on-year than the prices of goods leaving the factory gate, renewing the squeeze on profit margins. The latest UK CIPS report for July showed output and orders improving but output prices had continued to decline compared with the previous month.

The corresponding Reuters/CIPS European purchasing managers� index showed an easing in the decline for output and orders accompanied by further weakening for prices.

Rolf Elgetti of Commerzbank says: �A key conclusion is that, very untypically, the recent upswing in demand and new orders has not been met with rising prices. This means profit margins are weaker than in a normal recovery.�
So even in the "booming" UK, deflation still haunts the economy. Producer prices are rising not only in the UK but globally, especially in commodities, but retail prices are barely rising at all. So just as in the US, profitability must come from squeezing labor. In a deflationary context, this is the only way one can make profits.

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