Deflation fears spread beyond eurozone

Deflation fears spread beyond eurozone
The Euro logo is seen in front of the European Central Bank (ECB) building prior to the meeting of the Governing Council in Frankfurt am Main, central Germany, on July 4, 2013.

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

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

But 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 it 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 Europe powerhouse Poland posted annual inflation of 0.8 per cent for October, after 1.0 per cent in September and 1.1 per cent in August, far below the 3.7 per cent average last year.

Bulgaria meanwhile is in full-fledged deflation, with prices dropping 1.4 per cent on a 12-month basis in October.

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

Neighbouring Slovakia meanwhile has inflation at a three-and-a-half year low point, at 0.6 per cent.

But Alexandre Vincent of BNP Paribas said "a deflationary spiral is not the most likely outcome" in emerging eastern European countries "still transitioning into a market economy."

The countries, are also "very linked to Germany" and benefit from the dynamism that marks the continent's biggest economy.

Wolfgang Ernst of Austrian Bank Raiffeisen Bank International agreed: the risk of deflation was a priority for the eurozone, but less so for eastern Europe.

"These countries are still experiencing export-fuelled growth, but they should then see unemployment falls in 2014 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 living a new period of lower prices.

Sweden surprised many with prices falling 0.1 per cent in October on a 12-month basis, even taking its own central bank off guard.

And Britain posted inflation of 2.2 per cent in October, markedly higher than its European neighbours but still a 12-month low and sharply off the 2.7 per cent registered only a month earlier.

More about

Purchase this article for republication.

BRANDINSIDER

SPONSORED

Most Read

Your daily good stuff - AsiaOne stories delivered straight to your inbox
By signing up, you agree to our Privacy policy and Terms and Conditions.