DESPITE the downward trend in global prices, a global deflation crisis is still a low probability event, Public Bank said in the August 2003 issue of Public Bank Economic Review.
The proposition was based on several macroeconomic factors such as the narrowing output gaps of major global economies and the recent positive economic developments in the US and Japan.
Based on the recent data in the US and Japan, economists have become more upbeat on the prospects of the global economy as economic activities of US and Japan have improved in the second quarter, significantly better than expected.
Based on the narrowing output gaps in the Organisation for Economic Cooperation and Development (OECD) economies, present upbeats, and fiscal monetary flexibility in the US economy, a global deflation crisis is expected to be avoided, it said.
These healthy developments in the US and Japan will have a favourable impact on international trade for goods and services and thus, reduce global deflationary pressure as well, it said.
Meanwhile, the International Monetary Fund (IMF) in its recent study on deflation indicates that the risk of deflation in the US appears to be low due to the narrowing output gap, the relief provided by a recent depreciation of the US dollar, the availability of policy stimulus and the explicit willingness of policy makers to act.
The study also indicates that apart from the countries already beset with deflation such as Japan, Hong Kong and Taiwan, only a few additional countries such as Germany appear to be significantly at risk of deflation.
In addition, there appears to be lack of evidence to support strong concerns of generalised global deflation and widespread international transmission of deflation as perceived by some economists, it said.
However, the report believed that the risk of global deflation was not completely out of the radar screen if the major world economies continue to grow substantially below their potential and recovery in private investment fails to sustain.
The report said that as much as a runaway inflation disrupts economic growth, high deflation was equally hazardous to the economy.
Japan provides useful lessons in managing deflation to other countries.
For some time now, Japan has been in economic recession, worsened by the liquidity trap and the persistent deflationary pressure which has rendered monetary policy ineffective to spur economic growth, it said. Bernama