The UK is still considered to be the fastest growing advanced economy this year and recent figures showed an expansion of 0.7% in the July-to-September period. Gross domestic product (GDP) was 3per cent higher in the three months than the same period in 2013. To further trumpet recent economic performance, unemployment has decreased to its lowest levels since 2008 and inflation is currently at 1.2 per cent, considerably below the government’s 2 per cent target. So why is the oil price news not such good for the UK?
In order to successfully uphold profit margins, it is vital that companies reduce costs wherever possible. Rising costs are the greatest impediment to any business and one of the worst offenders is the price of crude, a main production factor for raw materials. Currently, wage inflation is not an issue, this being a main worry following periods of sustained growth which can result in reduced profit margins if the increasing costs are not immediately borne by the consumer. Currently, the reduction in the price of oil should initiate an increase in production of goods and services in the UK which in turn should increase exports. Unfortunately, the global slowdown (particularly in Europe which constitutes half of the UK’s trading activities) has meant that purchase orders have decreased considerable due to a significant reduction in demand.
The Euro Area GDP expanded a meagre 0.1 per cent in the second quarter with estimates by many for the third quarter at the same rate. Surprisingly, Germany contracted by 0.2 per cent in the same quarter with France still stagnating. Sadly, the UK’s economic performance may be vulnerable in light of the dismal performances of her trading partners and the reduction in the cost of production may not be a beneficial and supportive factor in fuelling exports to further her recovery. Indeed, the reason for the reduction in the cost of oil is due to the caused by shifts in both supply and demand. The world’s slowing economy, and stalled recoveries in Europe and Japan are reining back the demand for oil. There has also been a supply shock with the production of oil in the US increasing steadily since early 2013. China, the second largest importer of oil has experienced a significant reduction in demand, resulting in a slowdown which has directly affected her trading partners.
For the UK, the significant indicators of economic performance have been long-awaited, however, the real cost to the UK is the stagnation of the global economy. Previously, high oil prices have lead to a reduction in competitiveness (due to the cost push inflationary effect rather than inflation caused by a demand effect), however, the current levels are advantageous to the economy which has helped to reduce the rate of inflation to its current low levels. Unfortunately, these factors will not be of any use with the imminent threat of another recessive period for the UK’s trading partners.
Dr. Victor Chukwuemeka
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