Mon, Nov 18, 2013 - Page 15 News List

Deflation fears spread beyond eurozone

‘LATEST TWIST’:A deflationary spiral is the newest development in Europe’s debt saga, causing many to worry the eurozone may enter a Japan-like ‘lost decade’

AFP, PARIS

Fears of a deflationary spiral pushed the European Central Bank to cut its interest rate to a record low early this month, however falling prices are also affecting countries outside the eurozone.

Eastern Europe, as well as Sweden and Britain, have all posted surprisingly weak inflation numbers for last month, indicating a trend of slower increases in prices, if not outright drops, across the European continent.

Yet analysts believe the dangers of deflation in these regions are more remote than for countries using the euro.

Fear of entering a deflationary spiral is the latest twist in the continent’s debt crisis and a worry for economists who warn that the eurozone, in particular, may fall into the same trap that threw Japan into an economic lost decade that the east Asian country is only now beginning to leave.

Deflation is a vicious cycle where the anticipation of cheaper prices down the road pushes consumers and companies to put off purchases now, thereby stifling demand and pulling prices ever lower and the economy into a hole.

On Thursday, eastern European powerhouse Poland posted annual inflation of 0.8 percent for last month, after 1 percent in September and 1.1 percent in August, far below the 3.7 percent average last year.

Meanwhile, Bulgaria is in full-fledged deflation, with prices dropping 1.4 percent on a 12-month basis last month.

Hungarian inflation is at a historic low of 0.9 percent and Czech inflation is at the same amount, leading the central bank in Prague to draw up plans to intervene on the foreign-exchange market to mitigate the price falls by propping up the local currency.

Meanwhile, neighboring Slovakia has inflation at a three-and-a-half year low point, at 0.6 percent.

However, Alexandre Vincent of BNP Paribas said “a deflationary spiral is not the most likely outcome” in emerging eastern European countries that are “still transitioning into a market economy.”

The countries, are also “very linked to Germany,” Vincent said, and benefit from the dynamism that marks the continent’s biggest economy.

Wolfgang Ernst of Austrian Bank Raiffeisen Bank International agrees,

The risk of deflation was a priority for the eurozone, but less so for eastern Europe, he said.

“These countries are still experiencing export-fueled growth, but they should then see unemployment falls next year and 2015 with a revival of domestic demand” boosting prices, Ernst said.

“But inflation will never be very strong,” he added.

Some countries, notably Hungary, have big piles of debt held in foreign currencies and are far more sensitive to the relative strength of their currencies than to deflation fears.

Moreover, low inflation usually means a stronger currency, which brings a lower effective debt load if denominated in a foreign currency.

Other non-eurozone countries in Europe are also experiencing a new period of lower prices.

Sweden surprised many with prices falling 0.1 percent last month on a 12-month basis, even taking its own central bank off guard.

And Britain posted inflation of 2.2 percent last month, markedly higher than its European neighbors, but still a 12-month low and sharply off the 2.7 percent registered only a month earlier.

This story has been viewed 1732 times.
TOP top