Helios Padilla Mayer

Recent fall in producer and consumer prices throughout developed countries, a 4% fall in wages in Japan over the past year as well as price decline in number of developing countries indicate that deflation, not inflation is becoming a concern along with recession threats.

Financial crisis has turned into a vicious cycle of global debt, asset, commodity, wage deflation and low or negative economic growth. The ongoing fall of the US house prices led into a global deleveraging and ended into a global deflation. First, debt deflation occurred as commodities represented a safe heaven investment when weakening dollar sparked inflationary pressures worldwide and somehow it seemed that the rest of the world remained resilient to the US slowdown. However, it became clear that decoupling is not going to happen and the lag between the US and the rest of the world growth began to diminish.

When fears of global recession became real, demand for commodities weaken and commodity prices started to fall since their peak in July (commodity deflation). Oil has been particularly affected as reality of slower demand growth from China and other emerging markets failed to offset decreasing demand from the OECD countries, particularly from the USA. OPEC cut of oil production could not stem the decline.

Commodity exporting countries feel pressure of falling prices and the global credit crunch is already contributing to a reduction of imports, which is just another source of slowdown in the global economy in the short- to medium term.

Furthermore, the outlook for corporate earnings has been revised downwards which resulted in a massive fall of stock and corporate bond prices and therefore asset deflation. Wage deflation is going to contribute to a shrinking household financial wealth and along with rising debt servicing burden, lower household income will negatively affect consumption.

In conclusion, goods markets, labour markets, commodity markets, financial markets and bond markets are all sending the same message: recession and deflation is ahead in the US and global economy.

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^{Helios Padilla Mayer je senior commodity analyst, Fortis Bank, Brussels}

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