Friday, June 12, 2009

Commodity price increases: A threat to global economy recovery?

While Oil prices have increased by 75% since February 2009, wheat and others agricultural products , have increased by 25% as well .Thus the question about whether it is a trend for higher future prices, signalling a better chance of robust economic recovery , or it is the result of the speculative forces about these goods, as long as they might be used as financial assets, deserves to be considered . Either way, it is a factor which might complicate the prospect for economic recovery. In almost all recent economic downturn, commodities prices have decreased.-
The fact that input prices increases add cost pressures upon the production process, firms have no other alternative than to pass over such cost pressures to prices. But in a scenario of global economic contraction, such option is not feasible to be applied without risking further deterioration on consumer confidence and consumption, because of a deterioration in their purchasing power .
As the economy get closer to its stabilization point, the next step concern not only about the health of banking system , but also about the way Central Banks will get back all the money they have added into the economy to prevent inflation. Just in case those commodity prices , goes along to even higher level ,inflationary pressures might force Central banks to act sooner than expected, risking to abort the economic recovery or at least to make it weaker.
Thus , there is the chance that the expected economic recovery might be either further delayed or deliberately weakened , because of inflationary expectations which Central bank should cope with, implementing the necessary corrective policy action, which means reversing the expansionary mood following September 2008.Markets expectations about it, reflects already in the long term interest rate which are starting to increase.
This situation imply a new challenge for policy makers. The magnitude of fiscal expansion, means that sooner or later it will be important for those countries which have followed that path ,to consider the way to finance it .Thus , tax increases are also on the sight once the recovery is well on its way toward a more stable output path.-
It seems that it will not easy to move the economy forward, while it faces simultaneously supply side pressures, tax increases at sight, and inflationary expectations on the rise. All of these has led to anticipate that even with a recovery in process, unemployment rates will stay high for a longer period than expected .-
How to cope with all of these forces?. Whether the problem so far has been to shape better expectations, once this expectations improves , the key variable will be Central Bank credibility to keep inflationary expectations ,under control. With over capacity still available, supply side pressures would have for the moment a ceiling .Therefore an important proportion of those prices increases, might be due to speculative reasons. Tax increases are well ahead of schedule, as long as economic growth will also improve the tax payment and collection . The proper timing to take the right economic policy decisions, will become crucial in the months ahead.-