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Europe is about to fall into deflation. With oil prices now below $60, negative price growth is pretty much certain in the eurozone early next year.
The good news is that economists are projecting that Europe's deflation will be brief and mild. After a few months below zero, inflation will begin to rise again later in 2015, to 0.1% for 2015, according to Capital Economics. Most analysts think it will then pick up a little bit further over the following couple of years. Of course, most also predicted that Europe would not fall into deflation at all.
So what if Europe, like Japan, fell into a long period of mild deflation?
In that sort of scenario, Italy is Europe's biggest worry. Its economy is around eight times the size of Greece's, so it's a systemic risk for the whole of the continent that can't be easily isolated. If Italy sneezes, the rest of Europe can expect to catch a cold.
The main problem for Italy is government debt. Here's what Italy's public debt forecast looks like with no growth and no inflation:
The good news is that economists are projecting that Europe's deflation will be brief and mild. After a few months below zero, inflation will begin to rise again later in 2015, to 0.1% for 2015, according to Capital Economics. Most analysts think it will then pick up a little bit further over the following couple of years. Of course, most also predicted that Europe would not fall into deflation at all.
So what if Europe, like Japan, fell into a long period of mild deflation?
In that sort of scenario, Italy is Europe's biggest worry. Its economy is around eight times the size of Greece's, so it's a systemic risk for the whole of the continent that can't be easily isolated. If Italy sneezes, the rest of Europe can expect to catch a cold.
The main problem for Italy is government debt. Here's what Italy's public debt forecast looks like with no growth and no inflation:
Oxford Economics, Haver Analytics
This isn't a completely unbelievable scenario. In US dollars, Italy's trend growth between 1995 and 2011 was just 1%. Combine that with 1% deflation, and you would get the same scenario. That's what's really important here: nominal growth. (You want a bit of inflation combined with GDP growth because that makes you debts easier to pay — you're using today's money, which is now less valuable, to pay yesterday's debts whose prices are fixed.) If you don't have it, dealing with your debts is much more difficult.
Read more: http://uk.businessinsider.com/europe-faces-debt-crisis-and-permanent-austerity-if-deflation-sets-in-2014-12#ixzz3Ltvfc1kx
Read more: http://uk.businessinsider.com/europe-faces-debt-crisis-and-permanent-austerity-if-deflation-sets-in-2014-12#ixzz3Ltvfc1kx