No double dip, world trade is increasing but so are prices.


World trade slipped in April according to the latest data from CPB Netherlands Bureau for Economic Policy Analysis prompting fears of a double dip recession. Don’t panic just yet the index slipped by just 2.7 points and was still up by 17% year on year.

World import growth was up by 18% year on year but imports into Euroland were up by just 5%. Export growth from the Euro area was up by 10% and export growth from the USA was up by 19%. Asian imports increased by a staggering 34%. 

The USA is recovering, Asia and the China consumption model are becoming the engine of world recovery but at what price. Raw material prices are under pressure, China has restricted the export of “rare earth metals”. The world economy is recovering but prices are rising. Average trade prices were up by 10% with raw materials up by 46%. Energy costs were up by 67% in dollar terms.

Last week, The International Monetary Fund ( IMF) lifted the world's GDP growth forecast for 2010 to 4.6 percent from an April projection of 4.2 percent, according to the latest world economic outlook. The revised projection was "reflecting stronger activity during the first half of the year.” "The world economy expanded at an annualized rate of over 5 percent during the first quarter of 2010. This was better than expected in the April 2010 outlook, mostly due to robust growth in Asia," it said.

China, India, are forecast to grow at around 10% this year Brazil at 7.1%, the Asean five (Indonesia, Malaysia, Philippines, Thailand, and Vietnam) will grow at over 6%. The moribund EU will grow at just 1% in comparison.

The IMF expects oil prices to increase by 20% and commodity prices by 15% and here lies the inflation problem and the interest rate challenge for the UK.

The Bank of England model relies on the output gap to return inflation to a target level. The model is out of date. Pressure on prices will remain and extend as world growth and price levels increase. Imported inflation is the driver not some outdated version of the Phillips Curve and the meandering NAIRU. CPI will not return to target. A rise in base rates will push up Sterling and mitigate the international price pressure. UK Base rates cannot remain at 50 basis points.

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The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University, JKA's book "Apple from the iPod to the iPad, a case study in Strategic management is to be part published by Pearson in 2010 and by OUP (subject to contract) in full in 2011.

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