Downward trend stokes deflation fears

via Downward trend stokes deflation fears – The Zimbabwe Independent January 17, 2014 by Kudzai kuwaza/Taurai Mangundhla

Zimbabwe’s inflation rate continued on a downward trend, raising deflation fears, but economists see January Consumer Price Index rising driven by an increase in import duty and wage increments.

Fears rose after Zimbabwe’s inflation maintained a downward trajectory with economic commentators fearing possible deflation.

Latest Zimbabwe National Statistics Agency figures show annual inflation shed 0,21% to end the month of December 2013 at 0,33% while month-on-month shed 0,17 points from 0,09% in November to close the month of December at -0,08 %.

Zimstats said food and non-alcoholic beverages inflation stood at -2,20% year-on-year whilst non-food inflation stood at 1,61%.
Economist Eric Bloch allayed deflation fears. “I don’t think we will see deflation occur,” he said.

Bloch sees inflation closing the year at around 2%.

He said prolonged deflation would have a very negative impact on the economy although a brief period of deflation could be beneficial.

Analysts have warned deflation could act as a encumbrance for local manufacturers, further hurting an industry which is already suffering from a myriad of macroeconomic challenges that have seen average capacity utilisation plunge to 39,6 % in 2013 from 44,7% in 2012.

Deflation is a decline in prices often caused by a reduction in the supply of money or credit, and a decrease in government, personal or investment spending.

Generally, deflation has the effect of throwing people out of employment given the lower level of demand in the economy, which can lead to economic depression.

Zimbabwe’s situation has been worsened by the fact that unlike other central banks, which tend to stop severe deflation along with high inflation in an attempt to keep the excessive drop in prices to a minimum through various monetary policies depending on the bank’s objectives, the southern African country is crippled on that front.

For instance, the central bank cannot carry out simple interventions expected when signs of a recession appear such as coming up with a stimulus plan to kick-start the economy.

The US Federal Reserve and other central banks tend to intervene through quantitative easing, an economic euphemism for printing money, and bond and treasury bill issues.

This type of monetary policy intervention increases the money supply and typically raise the risk of inflation.

Bloch said while the 26% salary increment awarded to civil servants would be a drain on an already squeezed fiscus, the move would benefit the economy as it will improve revenue inflows.

The salary increments will to an extent also see a marginal rise in consumer spending as disposable incomes rise.

Zimbabwean companies have to survive in an environment prices remain generally low while operating costs may be higher, Econometer Global Capital (Econometer) head of research Takunda Mugaga said in an interview yesterday.

“It means the rate at which prices increase is in the negative yet the costs of production remains high,” Mugaga said.

In its 2014 economic outlook report, Econometer said Zimbabwe’s annual inflation in January 2013 was at 2,5% and continued to trend downward, reaching 0,54% in November.

The research firm said room for deflation in 2014 was quite remote with energy inflation and food inflation seen as the possible drivers of inflation.

“However the last quarter of 2014 might witness a slight rise in inflationary pressures which will see inflation closing the year at 1,3%. The government can only follow the inflation trends with no fiscal or monetary policy measure to influence it in the short to medium term view.”

Economist John Robertson said the reduction in inflation was being caused by “fierce competition” between retail traders as well as the weakening of the South African rand to the United States dollar.

He, however, pointed out that the inflation slowdown would be brief..

Robertson said the recent increase in import duty and wage increments would break the trend and will see a slight increase in inflation from this month onwards.

The prospects of deflation raise fears that this could increase the massive job losses and retrenchments that have wreaked havoc on the economy.

A July 2013 National Social Security Authority (Nssa) Harare Regional Employer Closures and Registrations Report for the period July 2011 to July 2013 shows 711 companies in Harare closed down, rendering 8 336 individuals jobless.

In addition, many companies are downsizing and have retrenched tens of thousands of their employees, condemning them to a gloomy future.

More and more companies are being liquidated, while others are being placed under the care of judicial managers as economic problems besetting the country mount.

Major companies that have retrenched include platinum miners Zimplats and Unki, Bindura Nickel, Spar supermarkets, Dairibord, Cairns, Olivine Industries and PG Industries.

According to the Nssa report, 330 companies in Harare in the retail and other business services category closed while administration-related businesses also suffered a huge knock with 59 companies closing, with the construction and baking industry losing 42 and 32 companies respectively.