Overheating is not just an Icelandic thing
On a very strange day that has seen most UK airports close because of ash clouds from Iceland’s volcanic activity passing through our airspace, its a different type of overheating that is worrying some economic commentators.
News that the Chinese economy grew in the 1st quarter of 2010 by 11.9% may well lead to the Chinese government tightening monetary policy to dampen the risk of inflation. Rapid recovery from a recession sounds like a great thing, but it does come with its own problems. Aggregated demand for goods and services can quickly outgrow supply, and this is what leads to price rises ( inflation), and ultimately another drop in consumer demand and a hasty return to recession. What we must hope for is a managed and smooth transition from recession into a period of sustainable growth.
Back home here in the UK, there is evidence that some industry sectors are bouncing back strongly too. In the IT sector for instance, a recent survey suggests that 4 out of every 10 Value Added Resellers of computer equipment reported double digit growth in the first quarter of this year. Once again, sounds like great news, but the risk is that some of these companies are “overtrading”,i.e. transacting much more business than their working capital positions can sustain. This in itself can adversely affect cash flow, and lead to insolvency. Now you can understand why business is all about balancing opportunity and risk! There are always two sides of a coin.