In Milan’s teeming commercial district, something unusual is happening this winter — Italians are shopping.
It’s a big relief for store owners after a six-year decline in sales due to recession. Still, Renato Borghi, the president of the Italian fashion federation, is uneasy: shoppers, he notes, are relying on the seasonal discounts. If they start expecting lower prices, the industry is in for trouble, AP reported.
“The Italian consumer is checking prices and waiting,” said Borghi, whose organization represents some 130,000 retailers. “This is a tendency that is causing us concern.”
Across Europe, companies are discounting to attract shoppers traumatized by years of recession and high unemployment. That’s helping cash-strapped families and even giving retail sales and the economy a much-needed boost. Growth figures recently published for the fourth quarter were stronger than expected, in part thanks to higher spending.
Double-Edged Sword
Weak prices, however, are a double-edged sword. They also carry the risk of deflation, when consumers start anticipating discounts and put off purchases in hopes of better bargains. If that becomes a habit, it can sink an economy for years. As prices drop, companies earn less, invest less and hold back on wages, making households even thriftier.
It’s too early to tell if the region is sliding into deflation, economists say, but the risk is big enough that the European Central Bank unleashed a 1 trillion euro ($1.14 trillion) stimulus program last month for the 19-country eurozone.
The bank acted aggressively because once an economy is in deflation, it can be mighty hard to get it out. Japan has been in deflation for over two decades during which its economy has struggled to grow.
By last count, inflation in the eurozone was negative — with prices falling 0.6 percent annually in January. Even excluding the slump in energy costs, prices for other goods are falling or remain weak.
Italy: Europe’s third-largest economy is exhibit A when analysts warn of the risks of deflation in Europe. It has the lowest level of inflation since the 1950s, when the country was still reeling from the devastation of World War II. For now, that is helping spending.
France: France is alongside Italy considered one of the more fragile of Europe’s large economies. Its inflation is at the lowest since official records began 25 years ago, with prices falling outright, even when excluding energy costs.
Spain: Spain gives some reason for hope. Though it has suffered a sharper economic downturn than Italy or France, it has also reformed its economy more and is now enjoying a recovery matched only by Germany.
Germany: Europe’s biggest economy is enjoying strong growth, and that seems to be tempering any real concerns of deflation.
Britain: Shop prices have fallen for 21 consecutive months in Britain, according to the main retail association. Yet the country, which is not part of the eurozone but is a key trading partner, is not fretting about deflation risks as much as its European neighbors.
