The Economic Picture at the End of 2009

Figures published by the Office for National Statistics show that during November the cost of factory raw materials and overheads have risen at their fastest pace this year. The main reason given seems to be the steady increase in the price of oil, which has led to input prices for November being 4% higher than in the same month last year when the cost of oil was in free fall. Factory output prices also registered an increase of 2.9% over the same period.

The impression among many observers is that this is only the first step towards strengthening consumer price inflation in coming months. This trend is likely to exacerbated by the imminent increase of the VAT rate from 15% to 17.5%. In this respect, the CPI inflation rate has increased from 1.1% in September to 1.5% in October and is expected to have risen to 1.7% last month. City economists forecast it to reach 3% over the coming months before retreating later in 2010.

With factory output prices rising at a slower rate that raw material costs (or input prices), this indicates that consumer demand is still volatile and manufacturers struggle to pass cost increases on to the end users. This is unlikely to change in the coming months, with the CBI predicting more job losses and growth for the first quarter of 2010 likely to be subdued at a meagre 0.1%. John Cridland, the CBI’s deputy director-general is also being quoted for stating that there is no sign of a clear driver of strong economic growth. Furthermore, the revised GDP figure for the third quarter still shows a contraction, albeit at the lower rate of 0.2%.

As far as the revised GDP data is concerned, the ONS says that this upward revision is due to a higher than expected construction output led by public sector projects, while the decline in house building slowed. Services and industrial production, however, were weaker.

Overall, the CBI expects the British economy to grow by 1.2% next year and 2.5% in 2011. These figures, however, are well below the growth rates predicted by the Treasury and will increase the pressure on the Chancellor of the Exchequer to find the money to fund its spending as tax receipts may lag behind expectations. And some observers hint that a Conservative government might raise VAT to 20% should they win the election in the spring.

But the news is not all bad: Recent OECD figures suggest that the health of the UK economy improved for the ninth consecutive month in October with the index rising to 104.6 from 103.3 in September.