The world economy is in a holding pattern at the moment with a great deal of attention focused on Greece.
That country’s recent election produced no clear winner. Subsequent negotiations to establish a coalition government have failed. The extreme left has shown no inclination to relent on its promise to ease the austerity measures imposed on the nation by the rest of the Euro zone.
As a consequence, there will be a second Greek election on June 17th. This will go a long way towards deciding whether or not Athens sticks with the Euro or returns to the drachma.
There’s also the possibility Germany, France and the other Euro members will be persuaded to ease the terms under which Greece might receive additional financing. But most Euro-watchers seem to feel this is unlikely.
Positions appear to have firmed up on either side of the debate. There is greater acceptance of the fact Greece might soon launch out on its own currency path.
But the effects of a Greek departure from the Euro are uncertain and financial markets hate such circumstances.
Banks have already been asked to take major hits from the Greek debt they’re owed. They must be prepared for a further significant blow.
There will almost assuredly be a severe depreciation in the value of Greece’s new currency.
This will place a tremendous burden on the nation. The price of imports will skyrocket.
Domestic banks (i.e., Greek) will need to be bailed out by the government. The expense of traveling outside the country will become prohibitive.
The cost of traveling to Greece, however – and much of the economy does depend on tourism – will become even more of a bargain.
In the meantime, output growth in emerging nations is being tempered by the lack of forward progress in Europe. China counts Europe about on a par with the United States as a customer for its export products.
Even here in North America, we’re caught up in the sticky mess that is the European debt crisis.
As a result, many of the most recent economic indicators have been neutral. The Consumer Price Index is a case in point.
A figure of +2.0% is the target level of inflation that the Bank of Canada (and the Fed, for that matter) is aiming for.
What’s remarkable at this time is that so many of the inflation indicators, both in Canada and the United States, are at or very near that +2.0% level.
Statistics Canada says the overall price level in Canada in April was exactly 2.0% higher than in the same month a year ago. Furthermore, the “core” rate of inflation – which omits usually volatile components, mostly in the food and energy sub-categories – was only marginally higher at +2.1%.
South of the border, both the all-items CPI and “core” annual rates were +2.3%.
The fact energy prices have eased has helped bring the all-items CPI change into closer alignment with the “core” increase.
The year-over-year energy sub-index in Canada was +1.1% in April. In the U.S., it was also almost insignificant at +0.9%.
Gasoline prices were +3.3% year over year in Canada in the latest month and almost exactly the same in the U.S., +3.2%.
The summer driving season, with families taking to the roads for their vacations, usually yields an increase in gas prices. So watch for that in the months ahead.
On a more global scale, the next big impact on prices may occur when Europe implements its import ban on Iranian oil on July 1.
For the construction industry, it’s always interesting to compare building costs with the CPI.
In the first quarter of this year, Statistics Canada’s apartment building construction price index rose 3.3% when capered with 2011’s first quarter. The non-residential building construction price index increase over the same time frame was +3.7%.
Both percentage changes encompass some commodity price increases from earlier times. It often takes a while for upstream costs to be felt downstream.
The current period of slack in the world economy has caused many commodity price movements to become quiet.
