Inflation concerns, job shifts and more - Views on News from Equitymaster

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Inflation concerns, job shifts and more

Jun 18, 2008

UK says time's up, US will wait
Stocks declined in the US markets yesterday following release of reports that showed growth is slowing in the world's largest economy. Even a decline in crude prices (for a third day in a row) could not soothe weak sentiments, as both the Dow and the NASDAQ closed almost 1% down apiece. The US central bank, Federal Reserve, has hinted that it might take a longer look at inflationary pressures before deciding on an interest rate hike. This led to a weakening (depreciating) of the US dollar against major currencies like Euro and Yen (higher interest rate will mean pressure on dollar to appreciate).

In the meanwhile, the International Herald Tribune has reported that inflation in Britain has accelerated to its ten year high (to 3.3%), further tying the hands of policymakers who are already grappling with a slowing economy. In fact, the situation the Britain, as in the US, is turning sort of a stagflation (rising inflation in a situation of slowdown in growth). The Bank of England (BoE) has further warned that inflation could rise above 4% levels in the second half of 2008, largely on the back of higher energy costs. This would really limit options for the BoE to cut interest rates in order to spur economic growth. The India central bank, the Reserve Bank of India (RBI), has already taken a lead when it recently raised sort term lending rates for banks (the repo rate) by 0.25% to 8%.

  • Also read - RBI mincing no words

    They call it "China plus one"
    Multinationals having manufacturing presence in China, and worried about soaring costs (wages, for instance, are rising 25% annually in dollar terms) and other upcoming issues in the dragon nation are looking out for diversifying operations in other emerging markets like Vietnam. As reported by the International Herald Tribune, these companies' 'long list of worries include , rapidly rising labor costs, shortages of workers and energy, a strengthening currency, dwindling tax breaks for foreign investors and the possibility of civil unrest'.

    However, as reported, the kinds of jobs that are being shifted from China to elsewhere in Asia tend to the low-skill, low-wage kinds. This is considering that China is deliberately focusing on ramping up its presence in the high-skill, high-wage industries like precision machining and computer component manufacturing.

    A similar sort of movement has also been seen in India of late, where multinationals are shifting service jobs (especially in the technology and back office outsourcing spaces) to other low cost regions like the Philippines and Indonesia. This is again considering rising wages of 15% to 20% in the Indian IT space, rising rentals as also a shortage of talent. Indian IT companies, in he meanwhile, concentrate on moving up the value chain by providing high end jobs like package implementation, IT consulting systems integration and software products to their clients overseas

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