Economic Outlook: Are We Post-Crisis Yet?

Prices are a key pulse-point of the economy, but there's confusion over what they mean. EDC's Peter G. Hall explains what the numbers are really telling us

Written by Peter G. Hall

Scan recent news reports, and you’ll find a full spectrum of inflation banter. Some fear that excessive liquidity will trigger a sudden upward price spiral. Others see deflation lurking in reports of sluggish overall growth, elevated risk and the unwinding of extraordinary policy measures. Still others see volatility in the clash between strong cost-push and weak demand-pull pressures. If prices are a key pulse-point of the economy, today’s confusion is a concern. What are the numbers telling us?

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Of inflation and deflation, the latter is still the lesser-known evil. But unfortunately, it’s the bosom-buddy of recessions, as the onset of weakness quickly spurs a wave of price-cutting. Persistent soft price growth is the hallmark of our post-crisis economy, absent only in emerging markets with heavy stimulus programs underway. This protracted price weakness is stoking fears of an entrenched “purchase-deferral” mentality, if you like, a broader extension of Japan’s double-decade debacle.

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Do current stats disagree? Europe’s numbers aren’t comforting. Although the latest GDP figures ended a six-quarter recession, prices remain unusually soft, with July prices tumbling in certain key countries. Nonetheless, pan-EU growth has been bolstered in the last three months by stronger core price growth in Germany and sustained gains in the UK. A more relaxed fiscal drag in the coming months suggests that disinflation may loosen its grip on the zone as we march toward 2014.

The jump in Japan’s June CPI sparked excitement that Abenomics is indeed rekindling optimism on the beleaguered archipelago. However, a spike in energy costs was the key driver; core prices extended a string of weakness, declining 0.1 per cent in June. Structural weakness and looming fiscal contraction suggest that it will be some time before Japan is out of its deflationary woods.

What of recent U.S. activity. Are prices illustrating a revival in demand? Without a doubt, house prices have staged a convincing comeback, up 12% over last year’s levels, and rising. Broader price gains are less dramatic, but steady. Consumer prices have nudged up to the 2% level, getting considerable lift from energy costs. Core prices are only slightly more subdued, but the details are a bit more troubling. Prices of services illustrate an economy on the move, but core goods are sluggish. Prices have barely budged in a year, and monthly growth is pancake-flat. Economic momentum suggests this will improve, but current data speaks loudly of persistent excess supply in the economy.

Gauging Canada’s price path is compounded by the awkwardness of the moment. Currently in transition from domestic to externally-led growth, the economy is in a soft in-between zone where price increases are quite muted. Housing prices are on hold as the market tries to find a foothold. Consumer prices are soft, with core growth vacillating between 1.0 and 1.5% under the mid-point of the Bank of Canada’s target range by enough to raise an eyebrow. Near-future performance will depend on a successful growth-shift and careful management of looming structural constraints.

On balance, OECD countries are still navigating economies that largely remain in a pre-recovery state. For the moment, general prices are reflecting this, meandering in a sub-par growth path and sending a sinister psychological signal to consumers and investors: it pays to wait. Dislodging perceptions from this state, a greater task than initially estimated, is key to a sustained recovery.

The bottom line? Breaking through today’s deflationary or disinflationary expectations could be as difficult as cracking the inflationary expectations that built up in the 1970s and 1980s. Regaining the inflation “sweet spot” could prove even more challenging. But getting to that point will make all the difference to the economy’s near-term growth path.

Peter G. Hall is vice-president and chief economist at Export Development Canada.

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