08S7C's Economics Blog

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A nice cartoon ...

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UK producer inflation at record

Manufacturers face rising costs
UK factory gate prices and producers' costs rose at a record pace in April, official figures showed.
The Office for National Statistics said that output prices for sales of manufactured products rose at a rate of 7.5% in the year to April.
Input prices rose 23.3% over the year. Input and output prices are at their highest since records began in 1986.
The data is likely to underscore policymakers' concerns about rising inflation as the economy slows.
Higher food and fuel prices accounted for the rise in input and output prices, along with increases in alcohol and tobacco duties following government tax changes.
The data came as the CBI said that small and medium-sized firms were struggling with high energy and raw material prices.
Retail pressure
The figures show that manufacturers are managing to pass on higher input costs to their customers, says the BBC's economics editor Stephanie Flanders.
However, she adds, the key question for the Bank of England is whether retailers will be able to pass them on to the final consumer - and so far, they have not been able to do so.
Analysts at Capital Economics said the higher cost of goods would not necessarily be passed on to consumers.
"We think that the consumer slowdown will mean that retailers will be forced to absorb the bulk of these cost increases in their margins," said Paul Dales, UK Economist at Capital Economics.
Consumer price index data for April is due to be released on Tuesday.
But Mr Dales added that the cost pressures could make the Bank of England's Monetary Policy Committee (MPC) more cautious on cutting interest rates.
"These data will maintain the MPC's reluctance to cut interest rates any faster."

comments:
In this article, the concepts of government intervention and tax incidence are prevalent. Government intervention is evident from 'government tax changes' which resulted in increase in alcohol and tobacco duties. Price mechanism does fail - instances involving demerit goods like liquor and tobacco. Hence government will intervene and the form in this article is via indirect taxes on goods. It is perceived by suppliers to add to cost of production and hence shift supply curve upwards. To produce the original quantity, they have to fully recoup their tax paid as well, hence they will raise equilibrium price(output prices for sales of manufactured products rost at a rate of 7.5%) and reduce quantity exchanged.
Consumer slowdown will be due to hike in output prices, hence products will be price elastic ie more than proportionate change in demand wrt change in price. Price elasticity of demand will therefore account for greater incidence of taxation on producers(retailers will be forced to absorb the bulk of these cost increases in their margins). Producers will not wish to lose too many customers due to over-increase in price, such that total revenue decreases. Perhaps the nature of manufactured products in the essay is addictive and has many substitutes.
We also need to consider the aim of the government in implementing these taxes. Possibilities are to increase tax revenue/restrict production.

Hui Pei

posted by pea @ 8:32 AM 0 Comments

British Gas bills may rise again

Households could see fuel bills rise again this year
Centrica, the owner of British Gas, has signalled that fuel bills could rise again as its profits are squeezed by higher gas and power prices.
Centrica said it would take "action to deliver reasonable margins".
It warned it may have to take action after wholesale gas prices increased by 92% from a year earlier, and wholesale electricity costs doubled.
Centrica said its profits would be "materially lower" in the first half of 2008 despite British Gas price rises.
In January of this year, British Gas increased gas and electricity bills by an average of 15% in the face of rising wholesale prices.
Price comparison website uSwitch.com said that the average household bill would rise by about 10%, or roughly £105, by late summer, with a further 15%, or £173, hike in January 2009.
"It's pretty clear that something has to give and that household energy prices are going to be shooting up again this year," said Tim Wolfenden, head of home services at uSwitch.com

'Terrible news'
Allan Asher, the chief executive of industry watchdog Energywatch, said that if British Gas raises prices, other suppliers could follow suit.
"Sadly if one company goes ahead and raises prices, others will respond."
"For the fuel poor, it's terrible news," he told BBC News.
In April, French bank Societe Generale said Centrica's residential arm could be loss-making in the first half 2008, unless it raised domestic prices again.
"Today's announcement is likely to put downward pressure on consensus of 2008 estimated earnings per share of 26.2 pence, but this should not come as a surprise to investors given the current commodity price environment," Cazenove analysts said in a note.
Centrica's shares were up 2.7%, or 7.75 pence, at 295.25p in late morning trade in London.

Legal action
Centrica also said it was taking legal action against consulting and technology firm Accenture over the design and implementation of a customer billing system.
British Gas received many customer complaints when the new system was rolled out in 2006 and 2007, it said.

Centrica added that since Accenture left the programme, British Gas had managed to stabilise its customer service and customer complaints to watchdog Energywatch have fallen by 85%.
Accenture has said it met the specifications laid out by Centrica, and that the system was ready on time and within budget.

comments:
Centrica's profits might be lower despite price rises due to increased costs of production (ie. wholesale gas and electricity costs increased) and possible anticipated decrease in consumption of such goods. Perhaps hike in prices might discourage consumers from expending too much resources and hence cut down on usage. Therefore consumer expenditure might decrease and this would lead to decreased total revenue. After deducting relatively high production costs, profits would be lower.
'If British Gas raises prices, other suppliers could follow suit'. We see here several dominant firms of gas and electricity suppliers, which implies oligopoly. There are 2 ways to see the reactions of suppliers: 1. they increase price as well. The rationale would be that these firms are mutually interdependent and hence they have to maintain a relatively close price range of products and services. 2. their price remain as normal. Rationale would be that more consumers would turn to them and their sales would increase, contributing to increased total revenue.
Therefore there could be 2 possible reactions of suppliers.
"For the fuel poor, it's terrible news". It is because increased prices will add strain to their finances and further reduce access to such commodities.
There would be downward pressure on estimated earnings of its market shares as profits would have fallen due to increased costs of wholesale gas and electricity. There is possibility of price drop per share which might result in reduced confidence of investor to buy its shares. Hence company may lose some revenue in the financial sector.

Hui Pei (no idea y my name is pea. but nvm)

posted by pea @ 7:10 AM 0 Comments

Surging food prices bite across Asia

Surging food prices bite across Asia
The Straits Times
11 May, 2008

SYDNEY - FROM the rice paddies of Asia to the wheat fields of Australia, the soaring price of food is breaking the budgets of the poor and raising the spectres of hunger and unrest, experts warn.

A billion people in Asia are seriously affected by the surging costs of daily staples such as rice and bread, the director general of the Asian Development Bank, Mr Rajat Nag, has said.

'This includes roughly about 600 million people who live on just under a dollar a day, which is the definition of poverty, and another 400 million who are just above that borderline,' he said.

Globally, the World Bank last month estimated that 33 countries were threatened with political and social unrest because of the skyrocketing costs of food and energy.

Across Asia, workers made a campaign against high food prices their May Day battle cry last Thursday in marches through cities including the capitals of Indonesia, the Philippines and Thailand.
While the demonstrations were mainly peaceful, concern is growing over the potential for political instability and unrest if high prices persist.

'Once people get hungry they start also getting quite desperate and take desperate measures,' Mr Damien Kingsbury of Australia's Deakin University said.
India's top farm scientist and architect of the 1960s 'Green Revolution', Mr Monkombu Sambasivan Swaminathan, has said India needs a second agricultural revolution to boost food supplies or face huge social turmoil.

Experts blame the high food prices on a confluence of factors, including increased demand from a changing diet in Asia, droughts, the rising use of crops for biofuels, and growing energy and fertiliser costs.

In Australia, which usually ranks second after the United States as a global wheat exporter, several years of drought cut harvests to just 13 million tonnes last year from an average of 22 million tonnes.

So while consumers are struggling, Australian farmers are not getting rich on the backs of the poor, said National Farmers Federation chief executive Ben Fargher.

'It's been the worst drought in our history and many, many farming families are under significant financial and emotional stress and it will take our communities a long time to recover,' he said.

And even in a relatively prosperous country like Australia, people are feeling the squeeze in the supermarkets, prompting the government to launch an inquiry into how to stem rising grocery prices.

Around the rest of the region, the impact varies from traumatic to minimal:

Afghanistan: Millions of Afghans are finding it 'problematic' to meet their basic food needs with prices of the staple, wheat, doubling in some areas over recent months, the World Food Programme has said. About 400 people demonstrated in eastern Afghanistan last month, blocking a key road linking the eastern town of Jalalabad to the capital Kabul and demanding the government step in to control prices at food markets.

Bangladesh: One of the world's poorest nations, Bangladesh has been hit by a doubling in the price of the main staple, rice, in the past year and many low paid workers say they have been forced to make do on only one meal a day. Last month about 20,000 garment workers rioted near the capital Dhaka for higher wages to cover food prices.

Cambodia: Soaring rice prices have forced the World Food Programme to indefinitely suspend a programme supplying free breakfasts to 450,000 poor Cambodian schoolchildren.

China: Chinese Premier Wen Jiabao told a meeting of the State Council last month that high prices were the biggest problem in the domestic economy. 'The inflation is led by food price rises, which especially hurt the poor,' said Mr Ma Qing, a Beijing-based analyst with the CEB monitor group. 'So the pressure (on maintaining social stability) is certainly quite large.' The finance ministry announced a special 100 per cent duty on exports of fertilisers and the raw materials used to make them in order to ensure domestic supply over the ploughing season and 'guarantee this year's grain harvest'.

India: A general strike against spiralling food prices paralysed Kolkata on April 21 as thousands of police were deployed across West Bengal state to stop protests turning violent. New Delhi has already slashed food duties and banned exports of lentils and other staples, and will not hesitate to further 'sacrifice revenues to control prices', Finance Minister Palaniappan Chidambaram said.

Indonesia: Anger over rising food prices was a focus for some 10,000 Indonesians who took to the streets of the capital Jakarta for Labour Day rallies. High prices for rice, cooking oil and soybeans helped drive Indonesia's annual inflation rate to 8.17 per cent in March. Japan: In resource-poor Japan, which relies on imports for 60 percent of its food, companies have hiked prices on everything from beer to beef, mayonnaise and 'miso' paste made from fermented soy beans in recent months. Although Asia's largest economy has been struggling for years to end deflation, rising food and commodity prices have not been welcomed because of the pain they inflict on small businesses and low-income households in particular.

Malaysia: Anger over rising prices was a major factor in March elections which saw the ruling coalition lose a third of parliamentary seats and five states in its worst results in half a century.

Nepal: Nepal last week banned the export of grains as prices soared. 'There is a high possibility of food crisis in a poor country like ours where domestic production is not enough,' said Mr Hari Dahal, a spokesman at the ministry of agriculture.

North Korea: North Korea's food crisis has already seen some people starve to death in remote rural towns, according to an aid group which works in the impoverished communist nation, South Korea's Good Friends organisation. Prices of staple foods have almost tripled over the past year.

Pakistan: Analysts say public anger over food shortages, particularly wheat flour for the staple roti bread, was a factor in the defeat of President Pervez Musharraf's allies in elections in February.

South Korea: Rising rice prices abroad have almost no impact on South Korea, which imports less than five percent of its annual consumption and heavily subsidises its rice farmers.

Singapore: Singapore is the wealthiest economy in South-east Asia but charities say inflation is driving more people to join queues for free meals. Consumer price inflation reached 6.6 per cent in January-February, officials said.

Taiwan: Taiwan is self-sufficient in rice so international prices have no impact. However, domestic rice prices hit a 26-year high earlier this year due to typhoons affecting the harvest.

Thailand: In Thailand, export and domestic rice prices have risen about 50 per cent in a month. Some farmers have taken to arming themselves and staking out their fields at night to protect their precious crop from rice thieves.

In a phrase particularly chilling for Asia, the World Food Programme has described rising food prices as a 'silent tsunami'. -- AFP

posted by kalok the great @ 1:23 AM 0 Comments

Corn prices soar, rice swells as flour holds tight!
Christopher BurnsMonday, October 29, 2007
THE enduring resourcefulness of corn has finally managed to stretch the price of a pound of rice way beyond its swelling capacity, but enough to also cause collateral damage to the ego of "gungo peas", as it jostles for position among fewer grains of the good ole Uncle Ben's.

While, on the other side of the plate, the relationship between corn and wheat has gone so sour that cornmeal dumpling is no longer amused, because its main companion, flour, has been biting the dust on account of the "Bully Rhygin" behaviour of the price of corn, as it takes pride of place in the biofuel industry. For now, rice and flour are hollering for some of the subsidies corn has been receiving, and chickens are no longer merry, because the corn hawks are too near.
Excursus aside, from the statuesque colonial structures of Mexico City to the unforgettable corners of Rome, where the Trevi Fountain occupies pride of place in the square with the same name, consumers are paying, and bracing for, higher prices for corn, corn-based products, rice, wheat, flour-based products - such as bread, buns and biscuits - poultry products, pork and its derivatives, and a host of other basic food items.

There is a combination of factors driving world commodity prices. Chief among these factors are soaring oil prices, higher freight rates, stronger maize price because of the demand for ethanol and decrease in acreages planted due to climatic and other environmental changes in places like Australia. Like other commodities such as wheat, the rice fields of Asia are in danger from extreme weather.

In Indonesia, for example, production may fall short of demand because of El Nino weather conditions which hurt rice crops. Price increases are also influenced by population growth, historically low levels of stocks, high demands and a progressively weak US dollar to which several world currencies are pegged. However, apart from global demand and environmental maladies, higher input costs for labour and fertiliser have been fuelling the latest price increases.
Unfortunately, there is no end in sight for a levelling off of corn prices. There were about 110 ethanol refineries in operation in the United States at the end of 2006 with another 73 under construction. With generous government subsidies and a commitment to produce 35 billion gallons of ethanol by 2017, the enormous volume of corn required to produce this "clean" fuel will continue to send shock waves throughout the global food system. Sadly, at the epicentre of these upward price movements are billions of the world's poorest people.

The heightening demand for corn is decreasing the supply of other grains, including soybeans, because farmers are shifting fields to make room for corn. And, as economists will tell you, rising rice prices is an automatic result of rising wheat prices. When wheat prices rise and people shift to close substitutes like rice, they also go up. Economist at the Food and Agriculture Organisation (FAO), Adam Prakash, is forecasting substantial increases in the cost of imported food for least developed countries of upwards of 90 per cent above what they were in 2000.

In Mexico, for instance, President Felipe Calderon has had to ditch his free trade principles by forcing producers to sign agreements that fix the prices for corn products. His actions were precipitated by skyrocketing prices for corn on the world market that have been pushing up the price of the "humble tortilla", a main stay of the Mexican diet. This is no simple matter in Mexico, where 50 per cent of the country's 107 million people live on $4 a day, or less, and many of them survive on tortillas and beans.

The FAO is reporting that cereal import bills for the world's poorest countries are expected to increase by some 14 per cent above the 2006 level. As the FAO report states, "The total import bill of the Low-income Food-Deficit Countries (LIFDCs) is forecast to reach an all-time high of US$28 billion in 2007/08 and developing countries are likely to spend $52 billion on cereal imports. Wheat prices in the United States, for instance, increased from $4 per bushel in July 2006 to close to $6.5 per bushel in May 2007, translating to an increase of 63 per cent.
It's hard to think of a food that matters more - to more people - than rice. A pound of rice can easily feed more persons than a pound of yam can. Although it is grown in more than 100 countries, roughly 90 per cent of all the rice in the world is consumed in Asia where about three billion people depend on rice to survive.

According to the FAO, global rice consumption is estimated to reach 418 million metric tonnes in 2007, up from 414 million tons in 2006, while global rice production is expected to reach 415 million tonnes, down from 418 million produced in 2006. Global rice trade is expected to reach 29.8 million tonnes, up from 28.3 million tonnes in 2006. Strong economic growth in China has caused demand to rise more rapidly than supply, because growth in per capita income is increasing the consumption of rice.

Only recently, Agriculture Minister Dr Christopher Tufton gave the clearest indications of imminent price increases for most basic food items and pointed to the inevitability of growing backyard gardens to lessen financial burdens that are bound to come. I rather like the suggestion of self-reliance, but wonder about the ability of our people to just shift cultural gears overnight, when no such shift was envisioned.

In Jamaica's case, the passage of Hurricane Dean and the recent bout of heavy rains have exacerbated an already bad situation because domestic crops such as yams, bananas and sweet potato have been destroyed. And, as if acts of nature aren't challenging enough, the steady depreciation of the Jamaican dollar is not helping and is causing serious financial problems, especially for the most vulnerable. It will be interesting to see how government deals with these issues, although they are primarily driven by external geopolitical and economic happenings.

Julia's Comments:
As the prices of staples like rice and flour increase, everyone is feeling a pinch on their pockets. While some food vendors are able to absorb the increase in prices of these staples for the time being, in the long run, they may find that the burden is too heavy for them, and may have to resort to raising the price of the food they sell. Meanwhile, other food vendors have already started increasing the price of their food, or making use of alternative, lower quality brands. In a report on The Straits Times, it was also mentioned that prices of food in school canteens have been raised, if the food portions are not reduced. This has resulted in students packing food to school to save money, or to ensure that they do not have to study on an (almost) empty stomach. The hike in prices of commodities has indeed proved to be detrimental to both food vendors and consumers. Yet, it is hard to find an immediate solution for this acute problem, and consumers have no choice but to make do with the higher prices of commodities for now.

Posted by Julia

posted by - @ 10:01 PM 0 Comments

Bertolli may be latest Unilever brand for sale
Friday May 09 2008 on p34 of the Financial section.

(Unilever is actually a major manufacturer of food, home care, and personal products including margarine, tea, and Dove soap. Concept of diversification: This helps to lower risks and minimize potential losses of Unilever as different industries react differently to changes in market conditions. If the sales of one of its products fail, it can then be compensated by the high sales revenue of another product.)

Unilever is pondering the future of the Bertolli olive oil businesses as it continues to spin off famous brands in a cost-cutting drive.

The food and detergents group yesterday confirmed it was looking at the "best way to extract the best value" out of the world's leading olive oil brand, adding that any move would involve a licensing deal so Unilever could still use the Bertolli name. The group made the comments as it published upbeat results that bucked the trend of food companies squeezed by the rising cost of ingredients.

Plans for a spin-off of Bertolli follow Unilever's recent sale of the Boursin cheese brand under a cost-cutting and disposal programme that has slashed the workforce and sold off previously untouchable jewels among its brands.

The Bertolli business, which has annual sales of about €300m (£236m), was started by an Italian husband-and-wife team, Francesco and Caterina Bertolli, from a small shop beneath their home in Tuscany in 1865. It now produces several varieties of olive oil as well as pasta sauces, frozen meals and olive-based spreads.

The brand's possible departure from the Unilever stable follows the announcement last August that the group wanted to make widespread disposals that would wipe about €2bn, or 5%, off turnover. Part of that will be its traditionally core US laundry detergents and softeners business, which has faced stiff competition from Procter & Gamble.
In a quarterly update yesterday, Unilever said it was "progressing" with that disposal process and had received interest from a "number of parties". Overall, the latest results show underlying sales grew 7.2% as it increased volumes and raised prices almost 5% to offset the rising cost of ingredients such as oil and milk.

Unilever's shares jumped 5.4% to £17.52 after Patrick Cescau, the chief executive, said the group, with its family of everyday products and broad geographical footprint, now expected 2008 underlying sales growth to beat a previous 3-5% target range despite "challenging conditions". It singled out UK sales as particularly strong and flagged up double-digit sales growth in emerging markets in Asia and Africa.

Although the group has raised prices for consumers in the same way as rivals such as Premier Foods, maker of Mr Kipling and Hovis, it said it was also looking at changing recipes and production methods to ease the effects of pricier ingredients.

For example, Unilever said developing lower fat spreads and dressings, such as Hellmann's new "free range egg" extra light mayonnaise, tapped into rising demand for healthier foods but brought an added bonus of "reducing our dependence on costly vegetable oils".

(They are investing in Research and development for product differentiation, so as to make their demand more price inelastic. Furthermore, people nowadays are generally more health conscious, thus by developing lower fat spreads and dressings, it can actually create more demands for the products.
Moreover, research can also enable the firm to find cheaper techniques of production, thereby lowering their costs of production and increasing its profits.)

A spokesman said lower fat products meant less vegetable oil was used and that Unilever was also looking at swapping some ingredients for alternatives where it did not affect taste.

"One key element we look at to try and mitigate some of the commodity costs is reformulation, new technologies. But you only have a degree of flexibility. The base arbitrator is taste - if it doesn't taste the same you can't do it."

posted by yi shuen @ 4:49 AM 0 Comments

Toyota profit falls on weak U.S. sales

Toyota profit falls on weak U.S. sales

Automaker's quarterly net falls 28%, hit by lagging North American sales and stronger yen.

Last Updated: May 8, 2008: 11:21 AM EDT

CNN Money.com

TOKYO (AP) -- Toyota said the strong yen and weaker U.S. sales took a bite out of January-March earnings and projected worse was to come - a 27% plunge in its full-year profit. (Fall in accounting profits)

It would be the first drop in full-year profit in seven years for the automaker.

The results and outlook released Thursday highlight how the tough North American auto market is hammering profits. Meanwhile, unfavorable currency swings (losses in foreign exchange) added to a growing list of problems for Toyota Motor Corp., including soaring material. (Higher variable costs) and energy costs and a stagnant auto market (no shift in demand curve) in its home market of Japan.

"There is no mistake that things are seriously tough - even for Toyota," said Tsuyoshi Mochimaru, auto analyst at Lehman Brothers in Tokyo.

Still, the company appeared to be faring better than its American rivals. GM lost $3.3 billion in the first quarter. Ford had a surprise profit of $100 million for the same period but expects to lose money this year as the U.S. auto market deteriorates.

Honda Motor Co., Japan's No. 2 automaker behind Toyota, said last month that its January-March profit declined 86% compared with the same period a year ago because of a corporate tax levied on its Chinese joint venture. (Joint marketing and joint product promotion to save costs to increase profits and stay competitive) Nissan Motor Co. reports earnings next week.

For the fiscal fourth quarter, the automaker reported a 28% drop in net profit to $3.05 billion. It was the first decline in quarterly profit since April-June 2005.

Sales rose 3.8% in the most recent quarter to $63.14 billion.

Toyota had been on a roll with the success of its fuel-efficient models, (engaging in Research and Development to become X-efficient, reap more substantial internal Economies of Scale and for product differentiation-make demand curve more inelastic) including the Prius and the Corolla subcompact, which have gotten a boost from rising gas prices.

For the fiscal year ended March 31, Toyota racked up record profit of $16.54 billion - up 4.5% from the previous year. That was in line with the projection Toyota gave in February.

Annual sales grew 9.8% to $252.8 billion, also a record for the company.

But recent credit woes in North America have dampened sales in recent quarters.

"We are facing a severe business environment," President Katsuaki Watanabe said. "Toyota considers this headwind as a valuable opportunity to turn it into a more flexible and stronger company." (Toyota could engage in internal expansion- enjoy more internal Economies of Scale and increase productive capacity OR merging with another automobile company- increase competitiveness and increased market share)

Toyota projects this fiscal year's profit will tumble to $12.0 billion, while annual sales are seen falling 4.9% to $240.4 billion.

The last time the company's profit declined was in the fiscal year ending March 2002; the last time annual sales fell was in the year ending March 2000, mainly because of a weak dollar. (Less total revenue to be gained from the US market-when profit from the US market is converted to yen, profit is lesser)　　

Toyota - the world's second-biggest automaker after General Motors Corp also warned it will need to spend more in technology research and carry out cost cuts (to be productive efficient) to stay competitive. (Reap more internal Economies of Scale and increase competitiveness)

The recent shift to smaller cars is a crunch for the makers because those vehicles are cheaper and have smaller profit margins than trucks and other gas guzzlers. (Shift in consumer preference- Toyota must be able to adapt to market demand-Increased demand for smaller cars and decreased demand for bigger cars)

Toyota has been steadily boosting sales in recent years at a pace some analysts say is on track to overtake General Motors as the world's No. 1 automaker in annual vehicle sales.

For the fiscal year ended March 31, Toyota sold 8.91 million vehicles around the world. (Decreased output) That was slightly below the 8.93 million vehicles it had expected to sell for the fiscal year, but still 4.5% better than a year earlier.

North American vehicle sales, which had been strong for Toyota in the past, fell for the last fiscal quarters, according to the company. Japanese sales have also been stagnant recently.

Toyota said it expected to sell 9.06 million vehicles globally for the fiscal year through March 2009, up 1.6 from the year just ended.

Toyota shares slid 1.8% to $52.7 in Tokyo. The results were released just as the market closed. (Share price declines reflect negative consumer sentiment and poor outlook (prospects) for the automobile industry)

Ming Liang

posted by ming @ 3:31 AM 0 Comments

Crude oil near new highs above 124 dollars

SINGAPORE (AFP) - Crude oil traded near new all-time highs above 124 dollars on Friday after the OPEC cartel insisted the market is well-supplied and being driven by speculators.

New York's main oil futures contract, light sweet crude for June delivery, rose 62 cents to 124.31 dollars a barrel in Asian trade after closing at a record 123.69 dollars on Thursday at the New York Mercantile Exchange.

In after-hours deals, the New York futures contract soared to an all-time high of 124.57 dollars.

Brent North Sea crude for June delivery was 78 cents higher at 123.62 dollars a barrel.

In London on Thursday the contract crossed 123 dollars for the first time and jumped to a new intraday peak of 123.87 dollars before settling at a record 122.84 dollars.

Oil prices have smashed one record after another in recent days.

"The oil market is so overwhelmingly bullish at this point... it is looking at the 125-dollar mark as its next target," said Victor Shum, senior principal at Purvin and Gertz energy consultancy in Singapore.

OPEC Secretary General Abdalla Salem El-Badri said on Thursday that there was no shortage of crude oil, brushing aside US calls for higher output to dampen runaway prices.

"There is clearly no shortage of oil in the market," he said.

David Moore, a commodity strategist at the Commonwealth Bank of Australia in Sydney, said El-Badri was reiterating OPEC's view and "his words are not a surprise to the market."

Moore said OPEC's stance has already been factored into market prices.

The 13-member Organisation of the Petroleum Exporting Countries produces about 40 percent of the world's oil, with current output at about 32 million barrels per day.

El-Badri also maintained OPEC's stance that oil-market volatility has been driven by financial market developments and the increased flow of speculative funds into oil futures.

"The turmoil in some global equity markets and the considerable depreciation in the US dollar have encouraged investors to seek better returns in commodities, particularly in the crude oil futures market. This has driven prices higher," he said.

Shum agreed the bull run in crude has been driven by "investor interest" in commodities.

Venezuela, a key member of OPEC, said on Thursday its proven crude oil reserves had swelled to 130 billion barrels as of late April, marking a rise of 30 billion from its prior estimate.

Shum said the increase in Venezuela's reserves will not have much impact on the market's bullish sentiment.

"The increase in reserves does not mean that there will be an increase in output," he said. "No bearish news can dampen its momentum."

European Central Bank (ECB) chief Jean-Claude Trichet warned on Thursday that inflation is a serious problem for the 15-nation eurozone and said people should get used to higher energy prices.

"As we have said on previous occasions, inflation rates are expected to remain high for a rather protracted period of time," Trichet stressed after ECB governors left the bank's benchmark lending rate at 4.0 percent.

"While the US Federal Reserve has tried to keep the wheels of the capital markets greased with lower and lower interest rates, the European Central Bank has remained resolute is guarding against inflation, and the dollar has suffered mightily, as a result, generating the steep climb in energy and food prices," said John Kilduff at MF Global.

A weakening US dollar makes oil cheaper for buyers using stronger currencies.

Analysts say oil prices have also been buoyed by continuing violence in Nigeria, Africa's largest crude oil producer, where attacks have cut production by about a quarter over the past two years.

posted by Chen Ze Hong @ 11:43 PM 0 Comments

U.S. Recession?

New homes for sale in Marysville, Ohio. Sentiment has grown markedly in the last month that the U.S. economy, and particularly the housing sector, is in more serious trouble than previously thought.

Fears of a U.S. recession mount

Signs that the United States is facing a hard landing from a serious housing industry crisis multiplied Wednesday as forecasters at a prominent bank said that the world's largest economy was in or near a recession.

"Recession has now arrived or will very shortly," Jan Hatzius, the chief U.S. economist for the investment bank Goldman Sachs, wrote in a report Wednesday. Goldman is forecasting a "mild" recession contraction lasting two to three quarters.

Sentiment has grown markedly in the last month that the U.S. economy is in more serious trouble than previously thought. These fears have taken on new significance politically as presidential candidates on the campaign trail hear voters express mounting concern about the health of the economy.

Mindful of the political reality, President George W. Bush this week also acknowledged the United States had weakened considerably.

The Federal Reserve, which has acted with major central banks around the world in recent months to stabilize volatile financial markets, is expected to cut borrowing costs for the third time since September when it next meets January 29-30.

To be sure, the view that the United States will tumble into recession is still held by a minority of economists, and has not been endorsed officially by the Federal Reserve or the U.S. government. But for Goldman Sachs and some other forecasters, a recent report showing that employment growth in the United States had largely stalled was a signal that the broader economy had creaked to a halt as well. Job creation has long underpinned U.S. growth, which is driven largely by consumer spending.

In another sign that the crisis has not abated, the U.S. bond insurer MBIA announced an emergency plan to secure its gild-edged credit rating. The company's rating, a vital part of its business of guaranteeing payment of municipal bonds in the United States, has been scrutinized in recent months because of its exposure to securities linked to the deteriorating U.S. mortgage market.

Europe is also facing the increasingly serious question of whether it can keep up the pace of exports as the United States flirts with recession. Most economists have been sanguine about European growth amid weaker U.S. activity, but an economic contraction is another matter.
European stocks fell sharply Wednesday on concern that European consumers will not be able to pick up the slack as exports slow under the pressure of a strong euro and weaker global growth, particularly in the United States.

Asian markets were up, while U.S. stocks were flat in early trading.

Gold, a refuge in times of crisis but also a marker of exploding commodity prices, also continued its march upward, reaching a record high of $894.40 per ounce before falling back to $880.80.
Rising gold prices have also traditionally be a harbinger of higher inflation, and with price levels spiking in both Europe and the United States in recent months, economists have also begun to mull the possibility of a new "stagflation" - high inflation and low growth.

Headlining a bad day for consumer industries Europe-wide, the British retailer Marks & Spencer tumbled by nearly 20 percent to close at £409.25 pounds after it reported that sales dropped 2.2 percent at stores open more than a year for the quarter that ended in December.

British consumers, hit by higher mortgage payments caused by a global credit squeeze, rising energy costs and more expensive food, have been dialing back on purchases in recent months.
Oil prices, though off the record high of slightly over $100 per barrel reached early this month, show little sign of a serious fall, ensuring that consumers will have less to spend on other things. Oil prices edged up slightly on Wednesday to nearly $97 per barrel after a report by the U.S. Energy Dept. showed that crude stocks had declined.

German retail sales also fell 1.3 percent in November from the previous month, similarly a reflection that consumers are spending more money on staples and energy. Economists have been betting that German consumer spending will pick up in 2008, buoyed by falling unemployment.

"Consumer demand is weakening," said Lucy MacDonald, chief investment officer for global equities at RCM in London, Bloomberg News reported.

"Market conditions have become more difficult, and it looks as if they are going to remain like that for the rest of the year."

What is a recession?
A recession is a decline in a country's gross domestic product (GDP) growth for two or more consecutive quarters of a year. A recession is also preceded by several quarters of slowing down.

What causes it?
An economy which grows over a period of time tends to slow down the growth as a part of the normal economic cycle. An economy typically expands for 6-10 years and tends to go into a recession for about six months to 2 years.
A recession normally takes place when consumers lose confidence in the growth of the economy and spend less.
This leads to a decreased demand for goods and services, which in turn leads to a decrease in production, lay-offs and a sharp rise in unemployment.
Investors spend less as they fear stocks values will fall and thus stock markets fall on negative sentiment.

How to fight recession
Tax cuts are the first step that a government fighting recessionary trends or a full-fledged recession proposes to do. In the current case, the Bush government has proposed a $150-billion bailout package in tax cuts.
The government also hikes its spending to create more jobs and boost the manufacturing and services sectors and to prop up the economy. The government also takes steps to help the private sector come out of the crisis.

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