Petrol, Petrom, and the President

So, President Basescu is unhappy.

This is not unusual. President Basescu is often unhappy. You’d think that, having won the election last December against Prime Minister Nastase, he’d be at least content. But Basescu is a scrapper, and he’s always looking for a fight, and in recent weeks he’s found one. It’s about petrol, and Petrom.

Perhaps I should explain.
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Issing Gives Inflation Warning

More evidence today of how the Central Bankers and their economic advisers are doing their best to sound the inflation alarm. This time it is ECB Chief Economist Otmar Issing:

European Central Bank Chief Economist Otmar Issing said a surge in oil prices may lead to higher-than- expected inflation in 2006, as the bank edges closer to raising interest rates for the first time in five years.

“Rising oil prices are not only affecting current inflation rates but they’re also overshadowing next year,” Issing said in an interview on Oct. 14 at a banking event in Frankfurt. “It can’t be ruled out that risks for price developments will deteriorate that much over the medium term that we might have to expect the annual inflation rate to slightly exceed 2 percent.”

The comments were the second in three days suggesting the bank may raise its inflation estimate of 1.9 percent for 2006. The bank projects the level this year at about 2.2 percent. ECB President Jean-Claude Trichet said at a briefing after the annual meeting of the Group of 20 industrial and developing near Beijing yesterday that he can’t exclude inflation being “over and above” the bank’s 2 percent ceiling.

My view: this very much depends on the evolution of oil prices. There is little evidence of any strong impact on ‘core prices’ at this point, there is plenty of evidence of growth weakness. There is thus little justification from a purely eurozone perspective for any short term increase in interest rates, and certainly no justification whatsoever in the case of Germany.

UK Jobless Upward Trend Continues

U.K. jobless claims rose for an eighth consecutive month in September, extending the longest period of increases in almost 13 years, “as growth in Europe’s second- biggest economy slows”. This adds just a little more evidence to the fact that all is not necessarily currently all for the best in the land of John Stuart Mill. However as NTC research point out, not all is totally bad either:

Meanwhile, annual average earnings growth held steady at 4.2 percent in the three months to August, signalling that higher inflation is still not feeding through to wages.

So earnings continue upwards at a healthy clip, but not above trend. No evidence of ‘secondary effects’ here then. Which makes you wonder why the normally reasonable Mervyn King is currently being so evidently unreasonable. You can find my explanation for this here (and in the comments).

Mervyn King on Tuesday night signalled he was not convinced of the case for lower interest rates and could see many reasons why the rise in oil prices might increase inflationary pressure.
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Recession on the Horizon?

Morgan Stanley (among many others) have been busy cutting their 2004 and 2005 growth outooks. With Oil prices continuosly hitting new highs this all has some sort of inevitability about it. Whilst it is probable that the slowdown in growth will bring oil back from its current peaks, MS estimate that “the new equilibrium for oil prices is now somewhere in the $30-40 range — well above the $20 average of the 1990s”.

Obviously the oil ‘spike’ is well short of the magnitude of the 1970’s shocks, it is, however, no mere trifle. All of which leads MS’s Eric Chaney to conclude:

If, as we think, the barrel of Brent remains above $40 until the end of this year, the maximum impact of the shock will occur in the first months of 2005, where we see only 0.25%Q GDP growth. Because uncertainties surrounding consumers? and companies? reactions to oil prices are high, we reckon that the odds for a technical recession, i.e., two consecutive declines in quarterly GDP, have become significant despite assurances given by policy-makers.
Source: Morgan Stanley Global Economic Forum

Take care, you have been warned!

Update: this impression is only confirmed by the latest reading on the German-based he ZEW Center for European Economic Research’s index of institutional and analyst sentiment: down to 31.83 from 38.4, and by the decline in French industrial production in August.