Monday, 31 March 2008

Second-round Effects?

"ECB President Jean-Claude Trichet said March 26 it's ``imperative'' to avoid ``second-round effects,'' a term that describes attempts to offset higher costs for items such as food and energy through bigger pay or price increases."

The issue is mainly coming from the biggest economy in Europe, namely Germany.

Currently the ver.di Union (not a fake one) is negotiating pay increase in the magnitude of 8% for more than 1.3 millions public sector workers.

Regarding price increase, there seem to be a move in Finland by Valio to increase the price of Milk. It is estimated that it could reach 1 euro per liter by year end. According to Valio it will help the producers to "offset higher cost by price increase". Well read that, as well, as shifting state farming subsidies to an indirect tax on consumers for profiting overly subsidisized farmers.

Valio Ltd is owned by Finnish milk producers and processes and markets primarily milk based products.

"The ECB "will act'' to contain "alarming'' price pressures if its inflation goal is threatened, council member Axel Weber, who's also Bundesbank president, said yesterday, signaling the bank is ready to raise interest rates even as a global credit squeeze threatens the economy. "

So most probably Ver.di , the second biggest Union in Germany, will come to some kind of compromise in order to calm the ECB from aggressively increasing interest rates in order to avoid the propagation of this second round effect to other area in germany or Europe

For Finland, "bad luck", consumers are betwen the rock and the hard place. On one hand, Finland clearly suffer from lack of competition and are notorious for price fixing (usually agreed in Sauna, at least you can't get spied?) and in the other hand, wage pressures are on the downside due to glabalization or delocalization, thus clearly squeezing the consumer purchasing power.

I would not be surprised to see in the year or so, more housing and car being put back on the market as households discover that banks lend them money that they can bearly afford and is making too much stress on their finance and quality of life .

If the economy start to slow more sharply than anticipated then the offer will exceed the demand, at a time when "smart" investors are fleeing the real estate market, causing a sharp retreat of the housing price. What we will witness will just be what has happened in the past : housing market is cycle by nature.


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