This post updates the 10 economic predictions I made for 2011 in January.
As we progress through 2011, somehow it seems that the metaphysical fog that blinds us from seeing the future clearly is getting thicker and with that the exercise of predicting the future has become less certain.
1. Oil, hard and soft commodity prices will continue to rise
Driven mainly by the dangerous turmoil sweeping through the Middle East, Brent’s rise has accelerated, rising 29% from $94 to $121 over the quarter. As the Arab springtime has no logical limits or ends, I suspect this dangerous situation will continue and oil's rise will continue.
Gold continued its role as a hedge against troubles and rose 4% during the quarter. Silver rose 27% mainly on the back of strong consumer demand. It seems that the combination of safe haven appeal, industrial metal appeal and the self reinforcing power of rapid upward price momentum have created an unstable market.
Wheat, copper and zinc continued to rise until mid February, before closing lower over the quarter. The 2010 patterns of parallel price rises for these commodities continued until through mid February when they started to break down. These coincidental breakdowns seem to indicate that consumer markets are beginning to react to the pain of higher commodity prices and have called the top to these trends. It therefore looks as though the current ‘commodities’ boom may have peaked and is now headed lower. Due to the ‘feed through delay’ I do not expect these previous commodity price rises to be fully reflected in RPI measures until later in the year.
2. Central banks will raise interest rates
There has been much discussion recently as to whether the various central banks are following divergent paths. The common view seems to be that the ECB will raise rates and the US & UK central banks will keep rates at historically low levels. I agree that regardless of the stresses that ECB interest rate rises will have on the EU’s peripheral members the ECB has little choice but to raise rates. The argument that the BoE and the Fed will not raise rates looks less convincing. The BoE MPC is apparently ‘split’ on the issue and Bernanke is hanging onto the belief that observed increases in inflation will be ‘transitional’. In other words inflation will be short lived. There seems little chance of…
