23187
Deflation Stalks Eurozone
World Economy

Deflation Stalks Eurozone

The eurozone is poised to record its ninth quarter of economic growth, with economists predicting that gross domestic product figures scheduled for release Friday will show the economy expanded by 0.4% in the second three months of the year.
Unfortunately for the European Central Bank, that revival isn't dispelling the risk that disinflation will worsen into deflation, Bloomberg reported.
For reasons that future historians of economic policy may struggle to unravel, modern central bankers have decided that the Goldilocks rate of acceleration for consumer prices to run not too hot, not too cold, is 2%. And while forecasts compiled by Bloomberg suggest that economists expect the US to achieve that state of inflationary nirvana in the first three months of next year, prices in the eurozone are seen languishing at 1.5% in the first quarter of 2016 and then decelerating.
That outlook helps to explain why almost a quarter of the market for eurozone government bonds has negative yields, meaning investors are paying for the privilege of keeping their money in $1.5 trillion of securities, according to data compiled by Bloomberg reporters. It has been almost a year, for example, since German two-year notes paid more than zero.

  Disparity in Inflation
The disparity in the inflation outlooks for the eurozone and the US is also driving a divergence in borrowing costs. As Bloomberg strategist Simon Ballard points out, investment-grade borrowers are paying more to borrow dollars than euros, and the gap has reached its widest level since at least December 2009.
All of this is terrible news if you are Mario Draghi and your job as head of the ECB is to reinforce the improvement in the growth outlook by pointing to consumer price inflation heading back to your 2% target.
What's worse is that Draghi's favorite measure of future inflation expectations–the five-year rate on inflation swaps in five years' time–has been ticking lower in the past few weeks, after seeming to have reached a bottom at the start of the year.

  Price Stability Trap
The economist Paul Krugman has argued that even though deflation–commonly defined as a sustained period of falling prices–is relatively rare, a "price stability trap" can fool central banks into thinking all is well just because prices aren't actually declining.
As the inflation rate goes toward zero, it seems to become 'sticky': In the modern world, rapid deflation doesn't happen, and in fact slight positive inflation often persists in the face of an obviously depressed economy.
Consumer price gains have averaged just 0.1% so far this year in the euro bloc, and July saw a gain of just 0.2% after the first three months of the year all posted price declines.
So while Friday's growth figures will show the eurozone has successfully dragged itself out of recession, the inflation backdrop suggests there's still work to be done to dispel the threat of deflation.

  Bond-Buying
The European Central Bank settled €10.8 billion ($11.9 billion) of public-sector bond purchases last week, sticking to its increased pace to counter the summer lull.
The central bank’s purchases in the week through Aug. 7 took the total to €259.7 billion since the program started in March, data from the Frankfurt-based institution showed on Monday. It boosted the purchases of covered bonds to €2.6 billion, from a €2.3 billion pace in the previous week.
In the first week of the quantitative-easing plan, which aims to acquire €1.1 trillion of bonds through September 2016, the central bank settled €9.75 billion.
ECB Executive Board member Benoit Coeure said on May 18 that the central bank would increase the pace of bond-buying to counter expected lower liquidity in July and August.

Short URL : http://goo.gl/Gntk70

You can also read ...

Indonesia’s interest rate rise highlights need for urgent defensive action.
Argentina's return to financial chaos might seem remote to...
Pakistan Retains Stable Rating
Moody’s Investors Service said that Pakistan’s (B3 stable)...
Goldman Says US in Dire Straits
Goldman Sachs’ analysts delivered a weekend note on the United...
Taiwan Economic Sentiment Weakens
Sentiment toward Taiwan’s economy weakened in May after the...
Chan Chun Sing (L) and CEO of the Singapore Business Federation Ho Meng Kit,  at The Business Times Leaders Forum on Monday.
With the rise in unilateralism and protectionism, the...
Investments by state enterprise rose 11.5% from a year earlier.
Thailand produced its fastest economic growth in five years in...
Bruno Le Maire
The stability of the eurozone will be at stake if a populist...
Copper Edges Up
Copper edged higher on Monday after China and the United...

Trending

Googleplus