Deflation alarms ring louder as EU, Chinese factories struggle

Mon Feb 2, 2015 6:41am EST
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By Jonathan Cable and Wayne Cole

LONDON/SYDNEY (Reuters) - European and Chinese factories slashed prices in January as production flatlined, heightening global deflation risks that point to another wave of central bank stimulus in the coming year.

While the pulse of activity was livelier in other parts of Asia - Japan, India and South Korea - they too shared a common condition of slowing inflation.

Central banks from Switzerland to Turkey via Canada and Singapore have already loosened monetary policy in the past few weeks.

The European Central Bank also announced a near-trillion-euro quantitative easing program in a bid to revive inflation and drive up growth, though much of the bloc's Purchasing Managers' Index survey was collated before that announcement.

"There are a lot of places where central banks are focusing on easing rather than anything else. In the euro zone the ECB is going all-out now," said Jacqui Douglas, senior global strategist at TD Securities.

"Looking at the rest of Europe we are expecting more easing from Sweden and Norway, that is where most central banks are leaning right now. There is no real rush to move ahead with rate hikes."

Markit's final PMI reading for the euro zone, published on Monday, was 51.0, in line with the flash estimate. Although at a six-month high, it was only just above the 50 mark that separates growth from contraction. In December the index came in at 50.6.

Worryingly for policymakers, firms cut prices in January at the steepest rate since mid-2013. Data on Friday showed annual inflation was a record-equaling low of -0.6 percent in January across the 19 nations using the euro.   Continued...

An employee welds the exterior of a vehicle along a production line at a factory in Qingdao, Shandong province December 1, 2014. REUTERS/China Daily