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The past few months have seen the likelihood of deflation across several parts of the globe becoming too much to ignore. While the Japan economy has experienced years of close to zero inflation, the prospect of Europe heading towards to negative inflation is sobering.
Price inflation in the UK has also been muted, as has that in the US. And, the recent plummet in global oil prices is set to reinforce the deflationary influences on the global economy.
The numbers put headline inflation in the UK at 0.5% for the year to December 2014, and 0.8% in the US. The Euro area recorded inflation at negative 0.2% - although both France and Germany remained positive at a low 0.1%. Preliminary January 2015 numbers indicate a worsening, with Euro area at -0.6% and Germany at -0.4%.
China reported inflation at 1.5% in December, with the January 2015 figure declining further to 0.8%. India and Brazil are perhaps alone amongst larger economies, with their inflation rates much higher at over 5% and over 7%, respectively.
Further, recent comments include the Bank of England Governor expecting inflation “...will likely fall further, potentially turn negative in the Spring, and be close to zero for the remainder of the year”. The US Federal Reserve has stated that inflation “... has continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices.”
The European Central Bank (ECB) in January statement noted “On the basis of current information and prevailing futures prices for oil, annual ... inflation is expected to remain very low or negative in the months ahead.”
And at home the Reserve Bank of New Zealand stated “... annual inflation is expected to be below the target band through 2015, and could become negative for a period ...”
The spectre of deflation haunts officials, and rightly so. While the consequences of inflation are well documented, the consequences of deflation are as equally destructive. Indeed, some would argue that deflation is to be feared more than inflation. The prospect of consumers deferring spending expecting lower prices in the future can set back and already struggling global demand. However, it is the impact through increasing the real value of debt on corporate and sovereign balance sheets that could cause most dislocation.
It is therefore no surprise that the world’s authorities are turning their attention to averting this potential outcome.
While the United States Federal Reserve is beginning to ease back on its quantitative easing (QE) measures, the European Central Bank has become the latest to adopt this action.
The two catalysts for the ECB’s decision have been the stubbornly low growth outlook and the increasing prospect of Euro-wide deflation. Latest figures indicate Euro-area GDP grew by an anaemic 0.9% over 2014, with the French economy growing by only 0.2% and the Italian economy contracting by 0.3%, balanced by expansion of 1.6% in Germany.
Outside the Euro, the UK has taken the lead, with GDP expanding 2.6% in 2014, on the back of a buoyant services sector primed by strong consumer spending.
The sluggish nature of growth in Europe is further reflected in unemployment numbers, with the Euro area average unemployment rate ending 2014 at a stubbornly high 11.4%. Average unemployment across the wider EU grouping has dipped to 9.9%. Again, France and Italy record worrying outcomes, with their jobless rates at 10.3% and 12.9%, respectively. In contrast, both Germany and the UK have jobless rates now under 6%.
Faced with these indicators, and with Euro interest rates already zero (or negative), the ECB decided last month to purchase public and private securities to the tune of €60 billion per month. The ECB expects this action to continue to September 2016, “... and will in any case be conducted until we see a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below, but close to, 2% over the medium term”. The European authorities will no doubt be expecting such inflation to be also accompanied by a more robust growth picture.
New Zealand’s export achievements have been positive despite the difficult trading environment. With our two main trading partners China and Australia experiencing a period of sluggish demand, NZ merchandise export revenues for 2014 still managed to grow 4.2% on the previous year.
This was the equivalent of an extra $2 billion of export earnings. Dairy exports accounted for over $1billion of this increase, with our 2nd biggest earner meat adding $660 million. The following 16 of our largest exports contributed little to the increase, with growth ranging from a $200 million gain in revenue from kiwifruit to a $180 million reduction in receipts from cereals.
Noticeably, 2015 was a good year for many of our smaller commodity export exports, with kiwifruit, wine, other fruit (avocadoes in particular), fish and apples all enjoying good prices.
A range of smaller export categories were together responsible for $250 million extra in receipts.
However, figures for the most recent months have reflected declines in commodity prices, with dairy receipts for the 3 months to December some 25% below that of the same period a year earlier. While global dairy prices have recovered slightly last month, they remain more than 40% below those of a year ago. Consequently, the slowdown in our external markets will inevitably have a dampening impact on New Zealand over the early part of 2015.
Reduced volumes from drought this season is also likely to have a negative impact on the export efforts over the coming few months.
The expansion of manufacturing sector activity has been one of the highlights of the recovery over the past couple years. While a noticeable proportion of this growth has been driven by dairy processing activity, there has been robust expansion elsewhere.
For the year to September 2014, the non-metallic minerals sub-sector (including ceramics, glass, cement, and concrete) experienced activity at nearly 14% up on the previous year. In addition, furniture and metal products experienced solid growth over the year. Demand in these sectors is no doubt related to activity in the building and construction sectors, so this growth is likely to be a associated, at least in part, to the accelerating Christchurch rebuild.
In total, manufacturing activity for the year to September was 4.3% up on the previous year. Excluding the dairy and meat processing sub-sector, activity was up 3.8%.
More recent data from the Performance of Manufacturing (PMI) survey indicates that the industry has remained solidly in expansion mode. The PMI has been above the benchmark 50 level, which indicates expansion, since late October 2012. This observation is reinforced by the employment sub-index, which has been above 50 since mid-2013.
As illustrated, there has been some volatility in this index over the latter half of 2014. While some may be concerned about the fall in the latter months, this may more a reflection of an over-statement of the earlier surge in activity.
Interestingly, the PMI readings for both the Canterbury and Otago regions are well above the nation-wide figure. This reinforces the importance of the Christchurch rebuild to the heightened levels of economic activity currently being enjoyed.
While every effort is made to ensure that the information, opinions and forecasts included in this publication are accurate and reliable, BERL and all contributors do not accept responsibility for any errors or omissions, or for any loss or damage resulting from reliance on or the use of information, forecasts or opinions it contains.
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