The mention of deflation in the above front page headline of Friday’s Financial Times will not have surprised blog readers. But it appears that not enough people in the European Central Bank read the blog, as the FT went on to report the ECB’s sense of “shock” at the thought that deflation could now be just around the corner.
This highlights the enormous gap between policymakers and those of us living in the real world. The Eurozone’s ageing population means deflation is much more likely than inflation, for the reasons last discussed back in July. It really should be no surprise to anyone in the ECB that October’s inflation was 0.7%, less than half the 2% target, as we remain firmly in the Cycle of Deflation pictured above:
- Competitive Devaluation is already underway, with the Japanese yen down 13% versus the US$ since January
- Commodity market weakness in oil, aluminium and cotton suggests actual deflation may not be far away
- Once deflation starts to take hold, people will start to delay purchases, as prices will be lower in the future
- This will be a complete change from the inflation of the SuperCycle
- Then rising prices made it sensible to bring forward purchases, particularly as credit was easy to obtain
As the BBC’s Robert Peston points out, the endgame of this Scenario is not difficult to imagine:
“If businesses and consumers began to believe that deflation was a serious prospect, they would defer purchases and investments to take advantage of falling prices – and the members of the currency union would be right back in the soup, with their economies shrinking sharply. Worse still, there would be an even greater incentive for businesses, households and banks to reduce their debts – to save as if there’s no tomorrow – because of the threat of deflation increasing the real burden of those debts. And that would be a double whammy to spending or investing today, and thus to the recovery”.
Hopefully your company has already begun to plan its response, should this Scenario occur. It is clearly becoming a far more likely Scenario than the consensus view that a return to SuperCycle growth, with oil at $100/bbl, is more or less inevitable.
The weekly comments from ICIS pricing and price changes since January on the benchmark products in the blog’s Downturn Monitor portfolio are below:
Benzene Europe, green, down 21%. ”Market continues to lack any clear sense of direction”
PTA China, down 16%. “Market extended losses because of weak demand and traders’ active selling activities amid a bearish market outlook
Brent crude oil, down 6%
Naphtha Europe, down 3%. “Glencore kept up its heavy activity in the window, switching roles from main buyer last week to main seller this week”
HDPE USA export, up 13%. “Prices were beginning to move lower, but prices have not yet moved low enough to attract significant interest”
US$: yen, up 13%
S&P 500 stock market index, up 21%