* Deflation talk probably won't become reality, say
* No economist in Reuters polls sees negative inflation in
* Policymakers set to meet in Davos
By Andy Bruce
LONDON, Jan 19 Talk that some of the world's
major developed countries are flirting with deflation, a
damaging and sustained spiral of falling prices, probably won't
turn to reality, according to the consensus of market
Described last week by the head of the International
Monetary Fund as the "ogre that must be fought", deflation is so
feared because it sparks a vicious cycle of behaviour that is
difficult to reverse - as the last 20 years in Japan has shown.
If consumers and businesses start to expect prices of goods
and services to fall in future they will postpone spending,
depressing the economy and causing prices to fall further.
But that is not on the cards, according to hundreds of
economists polled last week.
While inflation will remain weak through this year for most
developed countries, none of the more than 150 economists polled
by Reuters forecast even a quarter of consumer price declines in
any of the Group of Seven countries.
"We think the threat of deflation is somewhat overdone. The
obvious comparison is with Japan in the 1990s and 2000s, where
there was genuinely a deflationary situation," said Philip Shaw,
chief economist at Investec.
"But the Japanese experience suggests that deflation is much
more of a risk when credit institutions have broken down. And
that isn't the case for the majority of developed economies."
Although credit flows in the euro zone are weak and some
banks might need recapitalising, Shaw argues their situation is
still healthier than that of Japan 15 years ago.
In any case, the weakness of inflation will likely preoccupy
central bankers from major industrialised countries at this
week's meeting of politicians and policymakers at the World
Economic Forum in Davos, Switzerland.
"It looks as though low inflation is a reflection of the
waning powers of central banks as they have resorted to
unconventional monetary stimulus measures," wrote Stephen King,
group chief economist at HSBC, in an outlook for the world
"It is already abundantly obvious that unconventional
policies have had a bigger impact on financial asset values than
on the real economy."
Even if market economists think deflation an unlikely
scenario, few would argue it should be treated lightly by
As the severe global recession of 2009 showed, the
consensus of market economists and policymakers alike can be
"The IMF has to show it's not being complacent," said Shaw.
"But with regard to the recovery potential, I'd be much more
concerned if inflation jumped up because of a surge of energy
prices and food costs, as we saw in 2011."
IMF Managing Director Christine Lagarde's deflation ogre may
seem a distant menace to many forecasters, but they were largely
in agreement with her on the outlook for the global economy -
namely that its growth should pick up this year.
Last week's Reuters poll showed the world economy will snap
a three-year run of slowing growth by expanding 3.6 percent this
year compared with 2.9 percent in 2013 - almost exactly in line
with the IMF's forecasts.
How the spoils of that growth will be split will be a key
theme of this year's Davos meeting, starting on Wednesday.
A chronic gap between rich and poor is yawning wider, posing
the biggest single risk to the world in 2014, even as economies
in many countries start to recover, the World Economic Forum
said on Thursday.
Its annual assessment of global dangers, which will set the
scene for its meeting in Davos, concludes that income disparity
and attendant social unrest are the issues most likely to have a
big impact on the world economy in the next decade.
This week's economic data will at least give an early
flavour of whether the global economy is on track to meet
expectations of faster growth, and where it might be centred.
Markit's first batch of purchasing managers indexes (PMI) of
2014, due on Thursday, will show how the world's manufacturers
started the year in the United States, the euro zone and China.
The Chinese PMI could prove to be of particular interest,
given the mixed readings from industrial indicators towards the
end of last year in the world's second-biggest economy.
Scores of factories in China's manufacturing heartlands have
closed earlier than usual for the country's biggest annual
holiday due to weak orders and rising costs, workers and owners
say, suggesting a rocky outlook for a key sector of the economy.
Housing sales figures in the United States and January's
consumer confidence reading for the euro zone, both on Thursday,
make up the rest of the key data for this week. Economists
expect a modest improvement on both fronts.