Eurozone falls into deflation as M3 money supply shrinks

The Telegraph ^ | 6/30/2009 | Ambrose Evans-Pritchard

[bruinbirdman]

First time the region has tipped into deflation for the first time since modern records began half a century ago.

The eurozone region has tipped into deflation for the first time since modern records began half a century ago. Eurostat said the consumer prices index fell 0.1pc in June from a year earlier. The inflation picture has been distorted by the delayed effects of the oil crash from the speculative peak in mid-2008. But while prices are expected to rise again later this year after the commodity rebound, the eurozone is moving uncomfortably close to the sort of trap that engulfed Japan during its "Lost Decade".

Daniele Antonucci, of Capital Economics, said it was too early to sound the all-clear on deflation, given that capacity utilisation is at a record low of 70pc and producer prices are falling at rate of 5.7pc.

"There is a clear risk of a prolonged and damaging period of deflation. We think more stimulus is warranted from the European Central Bank," he said.

Julian Callow, of Barclays Capital, said the eurozone's "output gap" has reached record 4pc to 5pc, putting a powerful lid on inflation. "House prices are falling sharply and there is concern about the rising rate of non-performing loans. If the euro were to appreciate sharply, the ECB would face much bigger risk of deflation," he said.

The key surprise has been the fall in M3 money growth to a post-EMU low of 3.7pc in May, far below the ECB's 4.5pc reference target.

The ECB gave warning in its latest Financial Stability Report that banks would need to write down a further $283bn (£172bn) by the end of next year. "Policy-makers and market participants will have to be especially alert in the period ahead. The credit cycle has not yet reached a trough."

[bruinbirdman]

The ECB injected €442bn (£377bn) into the money markets last week, offering unlimited funds for a 12-month maturity. So far, the stimulus is not gaining full traction. Over half the money has been placed back on deposit at the ECB itself.

[dr_lew]

Well, you gotta figure it’s Obama, don’t you? It was always apparent that Europe didn’t know what side its bread was buttered on, but now they’re slowly starting to realize that their bread just fell on the floor butterside down.

[bruinbirdman]

The ECB is one thing. That's banks, mortgages, toxics, currencies.

Germany isn't buying into the stimulus trick. France and UK seem to be.

yitbos

[arrogantsob]

Given the German bankers view of inflation I would presume that the interest rate is still too high. This is killing the Mediterrean countries particularly.

[dr_lew]

Don’t they all share the same currency? Seems like I heard something about that. At my age, it’s all a blur.

[bruinbirdman]

Yeah, but, the comment was The Obammunist factor. Seems the EU is going it's separate way and Hussein cares little about whitey anyway given his cold shoulder to Merkel, Brown, the Queen and Sarkozy.

yitbos