Economy In For A Rough Ride
The latest set of figures concerning the British economy do not make for an encouraging read. A dangerous mix of rising factory-gate prices and a collapse in retail demand are not what the Bank of England would like to see.
The Office for National Statistics has already said that rising energy, chemical, and food costs have sent inflation for manufacturers up to 5% for December, which is the highest level of so-called factory-gate prices since the dark recession days of 1991.
Such bad news coming from manufacturers makes it worse for retailers. They have to buy at higher prices, yet with dwindling consumer spending, retailers have had to cut selling prices. There is increasing evidence of collapsing profit margins and poor sales over the Christmas and New Year sales periods.
Sports Shop Group JJB recently announced a second profits warning in six months after it had to discount so heavily to achieve sales that profit margins disappeared. Second half profits would be slightly below the expected £27.4 million, it said, as it blamed price-cutting to clear old stock. Although revenues were up over the festive period by 2.5%, margins were down by 4%.
Sofa stores group ScS Upholstery also had poor news, with like-for-like sales down by a devastating 16%. Aga, makers of upmarket cookers and ovens, admitted that it had missed 2007 sales targets after trade had slowed down in recent weeks, adding that it expected 2008 to be a demanding year for consumer business.
Global Insight economist Howard Archer said on Monday: "The December producer price inflation data were pretty nasty and probably contributed to the Bank of England's reluctance to cut interest rates for a second month running at [last week's] January monetary policy committee meeting. It highlights the fact that the Bank of England currently faces a very unappetising mix of slowing growth and significant inflation pressures, so has to carry out a very careful balancing act in the pace at which it cuts interest rates."
Decisions by the Bank centre on keeping CPI at or around 2%. JPMorgan's Allan Monks said: "We expect CPI inflation to accelerate significantly over the next six months. We don't believe the inflation outlook will stop the MPC from cutting rates but it may limit the speed at which they fall."
Meanwhile, the British Chambers of Commerce say that scarcity of funds for investment and reduced consumer demand will hit both exports and domestic sales in 2008. Its survey from quarter four 2007, due out this week, is expected to forecast a slowdown across the economy. Its third quarter survey contained optimistic views of the future for manufacturing and services, but opinions have changed since then. It echoes the view that manufacturers seem determined to push through price increases, raising fears of Seventies-style 'stagflation' - a combination of economic stagnation and rising prices. The trouble is that firms have had to deal with rising costs of energy and materials themselves.
Published on January 18, 2008
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