Business

Friday March 6, 2009

Deflation threat real

By FINTAN NG


Situation could worsen with further job cuts and falling growth

PETALING JAYA: As news of further job losses, slowing industrial output and falling demand continue to plague the global economy, the threat of deflation, that is, a broad-based decline in general price level, becomes very real.

Most if not all brokerages, local and foreign, have cut their forecasts for global economic growth as well as growth in major economies. Economists have also called for more comprehensive and timely macro policies from governments to avert a further slowdown.

Bank of America/Merrill Lynch Research recently cut global real gross domestic product growth to 0.1% this year from 1% in the beginning of the year as economic growth in Japan slumped and business conditions in the US and Europe deteriorated further in February.

Merrill Lynch Asia Pacific economist TJ Bond said falling growth and a brush with deflation would force governments and banks in Asia to act. “Macro policy has a lot of catching up to do,” he said.

CIMB Research economics head Lee Heng Guie said in a report it was conceivable that a sustained deflation would amplify the “vicious circle” of a much deeper and protracted recession.

However, he said the probability of a sustained deflation in emerging Asia “is very small” as over time interest rate cuts, stimulus packages and measures to stabilise the financial sector would provide a lift to demand and put a floor under wages and prices.

For Malaysia, Bank Negara has announced a total of 150 basis-point cuts in the key policy rate, the overnight policy rate, to 2% while fiscal pump-priming has been stepped up with the second stimulus package worth RM10bil tabled in Parliament yesterday.

The first stimulus package worth RM7bil was announced in November, of which 70% has been disbursed. Lee said deflationary forces had set in for most developed economies with the risk of a sustained deflation if central banks were slow in heading off the threat.

“The central banks need to keep money supply in expansion mode to avert a decline in prices,” he said.

Lee said rising layoffs, loss of real income and contracting demand were driving prices down, leading to a cutback in output. “The tight credit markets further aggravate the already slumping economy,” he said.

Lee said regional inflation was expected to ease in 2009 as growth decelerated or even contracted. “However, the sheer speed of the growth deceleration has raised the spectre of a return of deflation to Japan and a threat to China as well,” he noted.


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