Forex: EUR/USD: IMF warns of Eurozone deflation spiral

on Jan 22, 2014
Updated: Oct 21, 2019

**, Wednesday 22 January:**

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The International Monetary Fund yesterday released its latest World Economic Outlook, which warned that the mounting risk of falling prices in the Eurozone threatens to stall the fragile economic recovery in the bloc.
To avoid a deflationary spiral that could reignite the Eurozone’s crisis, IMF chief economist Olivier Blanchard urges the European Central Bank to get itself ready to act “if the next few numbers on inflation turn out to be weaker than they expect”. Blanchard says that the central bank could cut interest rates or use a targeted injection of cheap cash for lending to small and midsize companies in an effort to rekindle pricing buoyancy.

Whatever easing measures the ECB might prefer, the IMF economist argues that “it’s important for the central bank to commit to do anything needed to maintain inflation, thereby anchoring expectations, and to sustain demand”. The Washington-based lender of last resort estimates that the risk of deflation in the euro area has grown to around 10-20 percent.

In addition to stimulus, Eurozone bank balance sheet assessment is a key short-term task for the ECB, the IMF stresses in its outlook.
And even though the IMF has upgraded its 2014 GDP growth projection for the euro area by one-tenth to 1.0 percent, the outlook notes that “Southern Europe continues to be the more worrisome part of the world economy”.

In the IMF’s view, anaemic lending and demand still weigh on the ‘peripheral’ Eurozone countries, despite a recent strengthening in exports. What’s more, those countries face the ongoing challenge of balancing much-needed additional austerity measures and dangerously high unemployment, especially among young people.
The IMF is picking Germany’s GDP to expand by 1.6 percent this year, two-tenths up on the prior prognosis. Its most significant upgrade though has been for Spain’s GDP to grow 0.6 percent, half again up on October’s projection of 0.4 percent.
Italy is downgraded to 0.6 percent GDP growth, one decile below the prior projection. The French projection for growth of 0.9 percent is unchanged.


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