Eurozone ‘sleepwalking into a decades-long deflation trap’
World’s largest bond fund Pimco says falling prices are the biggest risk to the currency bloc in the new year
By Szu Ping Chan
TelegraphUK
28 Dec 2013
The eurozone is “sleepwalking” its way towards a Japanese-style deflationary trap that could last decades, the world’s largest bond fund has warned.
The Pacific Investment Management Company (PIMCO) said deflation posed the biggest threat to the single currency bloc in 2014. A stubbornly strong euro together with painfully slow reforms and a “paucity of ambition” threatened to push the bloc’s already low inflation rate into negative territory, the fund said.
“The demographics in large parts of Europe aren’t great,” said Mike Amey, portfolio manager and managing director at PIMCO.
“Even now, success in Europe is defined by 12pc unemployment and a growth rate of between zero and 1pc. If that’s success, they are at risk of slipping into deflation just because they’re willing to tolerate these economic conditions.”
Deflation poses a threat to economies, because if prices are falling people put off spending in anticipation of further falls. Retailers are forced to slash prices, which leads to declining profits, lower wages and people struggling to meet fixed loan repayments because of falling salaries.
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