Europe had its first brush with deflation in four years in August, as the effects of the pandemic continue to manifest across a shell-shocked global economy.
The flash read on Eurozone CPI for August was -0.2%, a notable downside miss to the 0.2% gain the market was expecting. The deflationary print matches the lowest estimate from 42 economists.
This will serve as (more) fodder for accommodation from the ECB, which moved swiftly to institute a variety of crisis-fighting measures earlier this year, chief among them Christine Lagarde’s pandemic purchase program.
Meanwhile, the final readings on IHS Markit’s manufacturing PMIs for the bloc (also out Tuesday) underscored the message from the preliminary prints — namely that the recovery is losing momentum.
“Continued gains in new business led to a slight increase in backlogs of work during August, the first growth in two years [but] manufacturers continued to make sharp reductions in employment”, IHS Markit said, noting that “job numbers were cut for a sixteenth successive month [while] manufacturers continued to utilize existing input stocks in production wherever possible”. That, in turn, means that manufacturers aren’t making new orders. Inventories of raw materials and semi-manufactured goods fell the most in eight months.
To be sure, it’s not all bad news. Germany now expects its own downturn to be less acute than initially feared, and with the exception of Spain and France, Europe’s manufacturing gauges are in expansion territory.
Tuesday’s disconcerting price data was tipped on Monday by country-level figures. In Germany, for example, consumer prices dropped 0.1% last month. Like the wider, bloc-wide gauge, it was the first sub-zero print in four years.
A similar picture prevails in Spain and Italy.
I suppose what I would note is that between the likelihood that the eurozone economy is plagued by spare capacity in virtual perpetuity and a currency that spent the last four months surging, you’re left to think the ECB has little choice but to push back.
There’s always an excuse for more easing these days (the pandemic gave every central banker all the plausible deniability they need on that front), and with European virus cases on the rise, and now deflation having made an unwelcome cameo, Lagarde’s first year “in office” (so to speak) is about to get more arduous still.
