I noticed something very different at the recent joint International Monetary Fund/World Bank conference held in Washington, D.C. The previous three years had been dominated by discussions of the European crisis, tail risk scenarios and the various potential solutions. But this year, in multiple days filled with more than 60 meetings, only a few focused on Europe. So it seems that not only has Europe turned a corner in terms of economic growth, it’s no longer top of mind for many investors. I agree that the Eurozone’s economy has bottomed. However, with inflation still very low and trending down (also known as disinflation), I believe that unless policymakers proceed carefully, one negative shock still has the potential to derail Eurozone growth, sending it on the path back into recession and potentially even deflation. The European Central Bank (ECB) cut rates on November 7, and because it’s so important for the ECB to show they are willing to proactively reduce deflationary risks, I expect further easing policies in the Eurozone. Eurozone inflation is very low, and trending down. A look at the chart below shows that headline inflation among the 17 EU member states is near the lowest levels since the series began in 1997. The only exception was in 2009, but because this series measures a rate of change, it may be skewed by the fact that food and energy both experienced all-time highs in the economic turmoil in 2008. Perhaps more troubling, while the numbers are a bit better if you remove the more volatile energy and food prices, those are also trending down. This may suggest a larger trend. Source: Haver Analytics, as of 9/30/13. In addition, there is no one source of disinflation; it is broad-based geographically, and at or close to deflationary levels in periphery countries like Greece and Portugal. The following figures from theECB highlight that headline inflation in many nations has been on a general declining trend since the summer of 2011.
Reported by Forbes.com 17 hours ago.
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