Retailers faced with stagflation
Ten years of profligate government by people with no experience or understanding of wealth creation have left the UK economy unnecessarily vulnerable. Inflationary waves from China and India will wash over the gunwales of Gordon Brown’s floundering economic legacy.
By altering the way inflation is measured, for ten years Brown managed to keep the rate between one and three percent. Any variation above or below these figures requires the Bank of England to take action to bring the rate back into line. We have now been over the maximum for two quarters.
Brown calculated that imported price and labour deflation would permit him to build up a vast inflationary ‘payroll vote’ of people dependant on the state. The largest public sector in Europe, he thought, could be relied on to keep Labour in power indefinitely.
Trouble is, parasites need the host to stay healthy, and Brown has done serious damage to British international competitiveness. Measured by global value GDP, the UK has been in a recession for the last twelve months, with nominal growth more than offset by currency depreciation. This is the 'stag (stagnation)' in 'stagflation'.
The second half of the term, of course, is inflation, which is nature’s way of telling an economy that it is bringing consumption back in line with wealth creation. Britain’s heavy reliance on imports has always made it more vulnerable than most societies to price inflation in other countries, and last week’s news from China and India confirms that the last prop for Brown’s economic Potemkin village has been kicked away.
Chinese inflation
The Chinese producer price index (PPI), which measures the value of finished products when they leave the factory, rose at an annual rate of 6.9% in Q1, and it’s going to keep rising because the cost of inputs have soared. Factory-gate prices of raw materials were up 19%, fuel by 18%, and power by 12.1%. Coal jumped 27.4%, and steel products averaged about the same. Export prices are also being affected by currency appreciation.
China’s consumer price index (CPI) target for 2008 was 4.8%. Not any more. The annual rate in March was 8.3%, following an 8.7% rise in February. Inflation was led by farm goods, which rose 25.5% in Q1. Pork, the country’s staple meat, rose 62.1%. Housing rose 11% YOY in March.
Bouts of high inflation caused riots in the 1980s and 1990s, and the government announced a raft of command measures to rein in consumer inflation, while the central bank raised the proportion of deposits that banks must aside as reserves to a record 16%, to reduce liquidity. In response to the week’s news, Chinese stocks suffered the biggest ever weekly decline.
Indian inflation
Although China’s loss has been the sub-continent’s gain in textiles, in India the booming technology sector is being battered by inflation. As in China, the absolute advantages of low labour costs and rental costs are being eroded by inflation.
Having more than tripled in size in just four years, India’s $52 billion software industry has been hit by the business slowdown in the US, its biggest single market. Simultaneously, India’s competitiveness is being eroded by an appreciating currency, rising fixed and operating costs, a growing shortage of skilled manpower and the prospect of a sharp tax increase.
India remains the most profitable destination for outsourcing, but wages are increasing at an annual rate of 15%, and the rupee has revalued about 10% against the dollar in the last year.
India’s particular problem is that the tax holiday on income generated at designated technology parks will come to an end in a year’s time. SMBs are looking hard at relocating overseas, because without the tax breaks the disadvantages of a creaking infrastructure and wage inflation become compelling.
‘Operating in India has become extremely difficult because of the government's fiscal policies,’ said Sankaran Raghunathan, president of the SME Association, which represents 3,200 SMB . ‘There is more of a push factor to go out than a pull factor to remain here.’
Doesn’t that sound familiar?
