analyst jim o'neill believes japan and china will be the only economies to be hit by deflation
Global deflation concerns are overplayed, analysts at Goldman Sachs have concluded.
Despite signs of a decline in risk aversion and a more optimistic mood in financial markets, investors continue to worry about the spectre of global deflation as a key risk, said analyst Jim O'Neill.
The Federal Reserve has focused squarely on this issue, he said. He added: 'Surprisingly, given our cautious views on the economic outlook, we think fears of deflation may be exaggerated. Although we expect disinflation to continue over the next 12 months or so, the risk of sustained negative price declines in aggregate measures like the CPI is still quite small outside those economies that are already deflating.'
The evidence, even from Japan, suggests deflation is quite difficult to engineer and only persistent policy failure would lead the global economy there, Goldman Sachs believes.
O'Neill said there is evidence to suggest deflation is difficult to engineer and could only be triggered by persistent policy failure.
The root cause of the current period of low and falling inflation lies in a straightforward combination of low-inflation and a severe industrial downturn, Goldman Sachs believes.
The solution to deflationary risk is also clear, O'Neill said. 'Ease policy aggressively and early and make it very clear policymakers will act with unconventional means if needed to prevent deflation and deflationary expectations from becoming entrenched.'
Goldman Sachs believes the main question is whether such policy moves will be delivered if needed. 'In the two main economies that are the focus of concern, the signs from the US are encouraging. Nor is there much evidence the eurozone as a whole is at risk. Germany remains the economy most likely to slide into persistent negative inflation, though the risks here may not be as dramatic as is often presumed,' he said.
Summing up the coming year, O'Neill said: 'None of this implies that our outlook for next year is particularly cheery. We continue to forecast only modest growth in real terms ' and attach a significant chance to a renewed US downturn.'Nominal growth in sales and revenues are likely to remain low by historic standards and pricing power will probably remain weak.
O'Neill said: 'Still investors should find some comfort in the fact that the prospect of outright deflation, Japanese-style, may be more remote than they currently fear.'
'As a global issue, the focus on deflational risk seems on the surface quite odd, he noted. Of the world's major economies, Goldman Sachs believes deflation is only a reality in Japan and China, as in many economies, both headline and core inflation remain well above 2%. Economies as diverse as Canada, Italy, Australia, New Zealand and Korea all have inflation rates that are closer to 3% than 2%.
'In the US, where deflationary concerns have been among the most intense, both core and headline inflation, measured either by the CPI or the PCE deflator, are running at around 2% whether measured over the past six or the 12 months,' he said. 'The same is true for the eurozone.'
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