Macroeconomic Impact From More Expensive Manufactured Goods In UK

“Two surveys have found UK manufacturers are continuing to increase their prices as they seek to counter rising costs”

--BBC News, 2nd June 2008—


Possible macroeconomic implications from more expensive UK manufactured goods:

1. 
   Worsening of Balance of Payments. UK’s manufacturing sector has been lacking behind all this while compared to its main rival such as Germany & France. By further increasing the prices of final output, it may cause a fall in the demand for UK goods & further deteriorate its competitiveness in global market. What’s more with the growing attractiveness of Chinese & Indian market that can consistently price their goods low even at turbulent times due to significant EOS
2. 
   Unemployment may rise in the coming months. Demand for the manufactured goods may fall & this shows possible fall in the profitability. 3 reasons account for this. First, pricey goods as mentioned above. Second, significant slowdown in global economy, which also translates to lower appetite for imported goods. Finally, people in UK may cut their consumption spending on these goods
3. 
   UK economy will further register slower growth or even fall into a recession. 2 reasons accounted for this. Consumer spending (C) & investment spending by firms (I) may register a smaller increase or even fall. C falls due to more people being unemployed while I falls due to fall in profitability. The downside effect of C could be greater given that the prices of property are declining in many areas in UK now. Traditionally, people in the UK hold their wealth in property

Arguments

1. Bear in mind that now, the pound is depreciating against many other currencies. From another angle, it means cheaper to import from UK. As such an increase in the price of output, could be offset by the fall in the value of sterling

2. Also demand for UK’s exported goods may not be affected at all as most countries in the world now are experiencing rising inflation due to rise in the price of energy. Some countries are recording at all time high inflation such as Vietnam 25%, Singapore, Thailand & Vietnam at around 7.5%-11%, India 8.75% etc. As such it could make no difference whether to import from UK or Vietnam

3. Balance of payments may not worsen as much as one thinks. Severe trade deficit in current account could be soften by an increase in capital account

4. The impact of slower growth or fall in the C & I due to higher unemployment & fall in capital expenditure may not be that bad. This is because most people in UK are still employed in the service sector & that is the strength of UK economy