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Global economy to face further slowdown – report

Global economy to face further slowdown – report

Qatar-Mubasher: Disinflationary dynamics is likely to continue this year, and possibly beyond, QNB has said in a report.

The global economy has started 2015 on the wrong foot, as the sharp decline in oil prices pushed the eurozone into deflation in December 2014 and resulted in a significant slowdown in inflation in Japan, the UK and the US, QNB said.

More worrisome, there is growing evidence that these disinflationary pressures are affecting wages and, to a lesser extent, asset prices. This is leading global investors to further hedge against deflation by buying long-term government bonds, pushing yields down to historic lows, according to the report.

Going forward, unless this disinflationary spiral is stopped, the world economy is likely to enter a prolonged period of deflation, also called the ‘Great Deflation’.

“Now, the reality of global deflation is upon us,” QNB noted.

The eurozone slipped into negative inflation in December 2014 (-0.2%) on lower energy prices. At the same time, the UK registered the lowest inflation rate (0.5%) since 2000, while US inflation slowed to 0.8%, the steepest monthly slowdown in six years. Japan’s inflation was barely positive (0.7%) in November 2014, excluding the one-off effects of the consumption tax hike in April.

Going forward, the expectation is that the eurozone will remain in deflation for the whole of 2015, despite the expanded Quantitative Easing (QE) adopted by the European Central Bank last Thursday. Japan is projected to fall back into deflation as lower energy prices feed into other consumer prices. The expectation is also that both the UK and the US will experience negative inflation for at least a portion of 2015. This would imply that more than half of the global economy will be in deflation in 2015.

Photo Credit: Arabianeye-Reuters