1. Page of
Economic Commentary
QNB Economics
economics@qnb.com
January
The Great Deflation of 2015
The global economy has started 2015 on the
wrong foot. The sharp decline in oil prices
pushed the Eurozone into deflation in
December and resulted in a significant
slowdown in inflation in Japan, the UK and the
US. 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. Going forward, unless
this disinflationary spiral is stopped, the world
economy is likely to enter a prolonged period
of deflation, what we have coined the Great
Deflation.
Ten-Year Government Bond Yields
(%)
Source: Bloomberg and QNB Group analysis
We had already warned about the dangers of
deflation in a series of economic commentaries
last year (see our commentaries dated 15 June
, 24 August 2014, 21 October 2014, 7
December 2014 and 21 December 2014).
Now, the reality of global deflation is upon us.
The Eurozone slipped into negative inflation in
December 2014 (- 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
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.
A more worrisome development is that these
global disinflationary dynamics are starting to
impact the wage setting behaviour across the
globe. In the US, average hourly earnings
declined 0.2% month-on-month in December.
Across the Atlantic in the UK, they similarly
declined 0.1% month-on-month in November.
Eurozone data on average hourly earnings is
only available on a quarterly basis with a
significant lag, but the latest available data
show a moderate increase (1.2%) in Q2 2014.
Japanese average hourly wages were barely
growing in November 2014. This weakness in
wage growth suggests that expectations about
future deflation are already affecting wage
setting behaviour. If this becomes entrenched,
the positive effects of lower oil prices on
consumption will be offset by reduced
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2. Page of
Economic Commentary
QNB Economics
economics@qnb.com
January
expectations of future income, thus putting
further negative pressure on an already weak
aggregate demand. The impact on growth from
lower oil prices would therefore ultimately be
negative.
There is also growing evidence that
disinflationary pressures are hitting asset
prices. The latest available data show that
house prices are falling in China, the Eurozone,
Japan and Singapore and they are significantly
slowing down in the UK and the US. Going
forward, house prices are likely to decline
further as deflation and lower wage growth set
in. In London, for example, estate agents
expect house prices to drop by up to 5%,
according to the UK Royal Institute of
Chartered Surveyors. In addition, global equity
prices have fallen by about 5% since their peak
in early July 2014, according to the MSCI
World Advanced and Emerging Markets Index.
While this is still within the normal volatility
range, it suggests that equity markets are also
pricing in the impact of deflation on global
growth.
In summary, deflation is starting to spread into
lower global consumer prices, depressed wages
and, to a lesser extent, softer asset prices.
Unless governments around the world prop up
aggregate demand through an appropriate
fiscal response, this disinflationary dynamics
is likely to continue in 2015 and possibly
beyond.
Contacts
Joannes Mongardini
Head of Economics
- -
Rory Fyfe
Senior Economist
- -
Ehsan Khoman
Economist
- -
Hamda Al-Thani
Economist
- -
Ziad Daoud
Economist
- -
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