LONDON (Reuters) — Talk that some of
the world's major developed countries are flirting with deflation, a
damaging and sustained spiral of falling prices, probably won't turn
to reality, according to the consensus of market economists.
Described last week by the head of the International Monetary Fund
as the "ogre that must be fought", deflation is so feared because it
sparks a vicious cycle of behavior that is difficult to reverse — as
the last 20 years in Japan has shown.
If consumers and businesses start to expect prices of goods and
services to fall in future they will postpone spending, depressing
the economy and causing prices to fall further.
But that is not on the cards, according to hundreds of economists
polled last week.
While inflation will remain weak through this year for most
developed countries, none of the more than 150 economists polled by
Reuters forecast even a quarter of consumer price declines in any of
the Group of Seven countries.
"We think the threat of deflation is somewhat overdone. The obvious
comparison is with Japan in the 1990s and 2000s, where there was
genuinely a deflationary situation," said Philip Shaw, chief
economist at Investec.
"But the Japanese experience suggests that deflation is much more of
a risk when credit institutions have broken down. And that isn't the
case for the majority of developed economies."
Although credit flows in the euro zone are weak and some banks might
need recapitalizing, Shaw argues their situation is still healthier
than that of Japan 15 years ago.
NO COMPLACENCY
In any case, the weakness of inflation will likely preoccupy central
bankers from major industrialized countries at this week's meeting
of politicians and policymakers at the World Economic Forum in Davos,
Switzerland.
"It looks as though low inflation is a reflection of the waning
powers of central banks as they have resorted to unconventional
monetary stimulus measures," wrote Stephen King, group chief
economist at HSBC, in an outlook for the world economy.
"It is already abundantly obvious that unconventional policies have
had a bigger impact on financial asset values than on the real
economy."
Even if market economists think deflation an unlikely scenario, few
would argue it should be treated lightly by policymakers.
As the severe global recession of 2009 showed, the consensus of
market economists and policymakers alike can be completely wrong.
"The IMF has to show it's not being complacent," said Shaw.
"But with regard to the recovery potential, I'd be much more
concerned if inflation jumped up because of a surge of energy prices
and food costs, as we saw in 2011."
IMF Managing Director Christine Lagarde's deflation ogre may seem a
distant menace to many forecasters, but they were largely in
agreement with her on the outlook for the global economy — namely
that its growth should pick up this year.
Last week's Reuters poll showed the world economy will snap a
three-year run of slowing growth by expanding 3.6 percent this year
compared with 2.9 percent in 2013 — almost exactly in line with the
IMF's forecasts.
RICH-POOR GAP
How the spoils of that growth will be split will be a key theme of
this year's Davos meeting, starting on Wednesday.
A chronic gap between rich and poor is yawning wider, posing the
biggest single risk to the world in 2014, even as economies in many
countries start to recover, the World Economic Forum said on
Thursday.
Its annual assessment of global dangers, which will set the scene
for its meeting in Davos, concludes that income disparity and
attendant social unrest are the issues most likely to have a big
impact on the world economy in the next decade.
This week's economic data will at least give an early flavor of
whether the global economy is on track to meet expectations of
faster growth, and where it might be centered.
Markit's first batch of purchasing managers indexes (PMI) of 2014,
due on Thursday, will show how the world's manufacturers started the
year in the United States, the euro zone and China.
The Chinese PMI could prove to be of particular interest, given the
mixed readings from industrial indicators towards the end of last
year in the world's second-biggest economy.
Scores of factories in China's manufacturing heartlands have closed
earlier than usual for the country's biggest annual holiday due to
weak orders and rising costs, workers and owners say, suggesting a
rocky outlook for a key sector of the economy.
Housing sales figures in the United States and January's consumer
confidence reading for the euro zone, both on Thursday, make up the
rest of the key data for this week. Economists expect a modest
improvement on both fronts.
