Sunday, January 19, 2014

Positive Economic Views Mixed with Deflationary Concerns

Last week, International Monetary Fund (IMF) Managing Director Christine Lagarde's comments about the world's economy included: 
  • momentum strengthened in the latter half of 2013, and should strengthen further in 2014—largely due to improvements in the advanced economies, 
  • global growth is still stuck in low gear
  • with inflation running below many central banks’ targets, we see rising risks of deflation, which could prove disastrous for the recovery
  • overall, the direction is positive, but global growth is still too low, too fragile, and too uneven.
  • it is not enough to create the jobs for the more than 200 million people around the world who need them and benefits of growth are being enjoyed by far too few people. Just to give one example: in the United States, 95% of income gains since 2009 went to the top 1%. This is not a recipe for stability and sustainability.  
Note: Deflation concerns are driven by declining inflation rates in the European Union (1.0% in December 2013, down from 2.3 % in December 2012) and in the U.S. (averaging 1.5% during 2013, down from 2.1% during 2012.)

MY TAKE

While others have shared many of Lagarde’s comments before, central bankers rarely discuss deflation.  When prices fall, consumers tend to postpone purchasing new items hoping they can obtain a better deal in the future. Businesses are likely to cut prices to attract customers, but will likely lose revenue.  This cycle, known as a deflationary spiral, is hard to manage and difficult to get out of. With stimulus efforts by central bankers likely reaching the point of diminishing returns, let’s hope fundamental growth kicks in.  

Note: recent research from the Conference Board, a widely followed think-tank, reported that global labor productivity grew 1.7% in 2013 and expects it Increase to 2.3% during 2014.

No comments:

Post a Comment