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Economic

4th October 2007, Page 46
4th October 2007
Page 46
Page 47
Page 46, 4th October 2007 — Economic
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Which of the following most accurately describes the problem?

indicators

In our third business supplement, CM focuses on financial matters, what's been happening to the domestic and global economies and how it affects you.

Interest rates and inflation

For hauliers trying to keep the wolf from the door, news that the Bank of England decided not to increase interest rates in September was welcome. Rates have remained at 5.25% in the UK since July, having risen five times in the preceding 12 months. However, it was the Bank's wish to keep inflation under control, rather than a desire to keep small businesses afloat,that was behind the decision to maintain the current rate.

The Bank's Monetary Policy Committee (MPC) meets regularly to set the rate and, unusually, issued a statement with last month's announcement. It doesn't normally do so unless it is making a change.The statement said heightened concerns about asset-backed securities have led to disruption around the world for the money market in general.

The MPC's mandate is to set interest rates to meet the Government's 2% target for inflation. In its August Inflation Report, the committee's central projection was for inflation to remain close to the 2% target over the forecast period and for output growth to ease, reflecting a slowing in consumer spending and business investment. However, inflation fell back to 1.9% in July and may remain around, or a little below, the 2% target for the next few months.

Pricing pressure

"Pay pressures remain muted," the MPC commented, "and there are tentative signs of a slowing in consumer spending. But the recent solid pace of output growth has been sustained, and the margin of spare capacity appears limited. Indicators of pricing pressure remain somewhat elevated." Meanwhile,the Bank of England said it was too soon to tell how far the disruption in financial markets would impair the availability of credit to companies and households. It was in these circumstances that the committee judged no change in bank rate was necessary.This would help to keep inflation on track and meet the target in the medium term.

Record defaults

At the beginning of the year, experts predicted interest rates would reach 6% by the end of 2007. However.problems in the banking community caused by the mortgage crisis in the US makes that unlikely. Subprime (cheap) mortgages are offered to people with inferior credit records or on low incomes in the US, but there have been record levels of defaults in the face of higher American interest rates.

Problems spread to the global loans market as banks exposed to sub-prime debt have become more cautious about lending money.

The US Federal Reserve has since cut interest rates by 0.5% to 4.75% in a bid to prevent those teetering on the brink of defaulting from falling over the edge:This might stabilise global finances..

Exchange rates

While the strength of the pound against the dollar (currently, £1=$1.99) is well documented, in theory this has little impact on UK hauliers.

Instead, it is the conversion to the euro that makes a difference, and this figure has been pretty static at around £1=€1.43.

According to Simon Chapman, chief economist at the Freight Transport Association, because the exchange rate with the euro has not really changed, there is very little implication for UK hauliers' competitiveness against European operators.

"I suspect the strength of the pound against the dollar means the UK is sucking in far more imports, particularly through the deep sea ports. There are huge backlogs at the Asian ports, while containers going back to Asia from the UK are very rarely full For those hauliers who move containers in the UK, however, the market should be buoyant," Chapman says.

The difference between the value of exports and imports in an economy over a certain period is known as the Balance of Trade. The latest set of figures show the UK's deficit of trade in goods and services was £4.4bn in July compared with a deficit of £3.9bn in June.

The surplus on trade in services was static at £2.7bn, but the deficit on trade in goods was 27.1bn, compared with a deficit of E6.5bn in June. Overall, exports rose by £500m and imports increased by £1bn. The trade deficit with EU countries narrowed to £2.6bn, from £3.1bn in June and the value of exports went up by £1bn, while the value of imports rose by £400m.

There were increases in exports of intermediate goods (raw materials), capital goods (such as machinery and tools), chemicals and oil. There were rises in imports of chemicals and cars.

The deficit with non-EU countries widened to £4.5bn in July compared with a deficit of 23.4bn in June, while exports fell by £500m and imports rose £600m. There were falls in exports of intermediate goods, oil and chemicals, but rises in imports of oil and non-automotive consumer goods. Excluding oil and erratic items, the volumes of both exports and imports were 4% higher in July than in June.


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