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Monday, May 19, 2003

Deflation: Now the IMF Warns

As if to confirm my impression that the 'new management' at the IMF are in fact reasonably in touch with reality (more so at least than their OECD counterparts), Rogoff serves us up a Deflation Index replete with a clear and direct warning on Germany. Note the additional mention of Hong Kong and Taiwan. For my money they are still too complacent on the US situation, and are simply wrong about Germany being the only EU country in danger. But then I suspect Edward Hugh is the only observer waving the flag right now on Italy, let's see if I'm still alone twelve months from now, shall we? Until we understand the causes we're never going to be able to treat the consequences.

The International Monetary Fund warned on Sunday that Germany was at high risk of deflation and that Japan might suffer further price declines. Hong Kong and Taiwan were also facing serious deflationary pressures.However, the IMF said other eurozone countries and the US remained at low risk of deflation despite equity market declines, high unemployment, weak output and geopolitical upheaval."Deflationary pressures are not strong enough to lead to generalised global deflation,” the IMF said. But those “pressures have risen in several countries."The IMF appointed a special task force to study deflation risks in the world's 35 largest economies and a special task force in December amid rising concerns about global price declines.The findings, approved by IMF chief economist Kenneth Rogoff on April 30 and published to the organisation's website on Sunday, may ease fears in some "low-risk" countries, such as the US and the UK. But they are likely to stoke them in countries now in the IMF's "high-risk" category.

The likelihood of Germany suffering a "mild deflation" over the next year was "considerable," the IMF said. The country had already seen inflation fall below 1 per cent, economic growth was expected to be only 0.5 per cent this year, and policy options were limited. Switzerland and a handful of other European countries were at moderate risk, the IMF noted, but their governments were seen to have more room for manoeuvre.In Japan, where the core consumer price index had declined for a consecutive 41 months, deflationary pressures showed few signs of easing. Hong Kong and Taiwan were also listed as "high risk" by the IMF.
Source: Financial Times

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