Economy sliding towards deflation

Economy sliding towards deflation
Published: 20 January 2014
THE economy is sliding towards deflation, a situation that could see overall output and competitiveness of industry being affected leading to a decline in employment levels, economists have warned.

Deflation is a decrease in the general price level of goods and services and it occurs when the inflation  rate falls below zero percent (a negative inflation rate).

According to official statistics, the annual inflation for December 2013 fell to 0,33 percent after shedding 0,21 percentage points from 0,54 percent last November.

Inflation has been going down for the past few months but, now economists fear that it might reach deflation levels.

"The major reason why inflation has declined is due to liquidity constraints in the economy which have led to low aggregate demand and if there is no improvement in the near future, the economy will slide into deflation," said Mr Prosper Chitambara, an economist.

Speaking on what deflation meant to an economy, Mr Chitambara said it affected industry and overall output and when productivity was affected, companies would be forced to shed off excess labour force hence resulting in low employment levels.

"Aggregate supply is supposed to equate aggregate demand," he said.

In a separate interview, economist Mr Brains Muchemwa said the fact that prices had been coming off for a considerable period now confirmed that we were already in a deflation.

"The evidence of flattening or declining corporate and government revenues is one of the consequences of the deflationary environment. Resultantly, high unemployment and falling investment levels become more pronounced," said Mr Muchemwa.

Mr Muchemwa said considering the inability of fiscal and monetary policy to directly stimulate the economy on account of the constraints imposed by the multiple currency regime, negative impacts of the deflation were likely to remain entrenched in the economy.

Zimbabwe National Chamber of Commerce chief economist Mr Kipson Gundani said the decline in inflation was an indication of decelerating economic growth and the situation would likely be a logjam that would require external financing given other challenges obtaining in the economy.

Mr Gundani said it was almost definite that the economy would get into a deflationary stage.

"You can set assumptions and do trend analysis and estimate but circumstances will always change. But I do see we will get into a deflationary stage. We are likely to witness decreasing inflation but it will naturally reach a plateau where the inflation will be low and also low economic growth and depressed demand," he said.

Speaking on measures that can be put in place to avoid sinking into such low levels of inflation, Mr Gundani said the major drivers behind the declining inflation were suppressed demand and the weakening rand.

"Demand is function of the income levels, therefore to reverse its deficiency you need to raise people's disposable incomes. However, this is in turn determined by the performance of the whole economy. So the solution is in solving all the other macroeconomic challenges.

"The rand issue is an exogenous factor that we do not have control over. Our situation is further exacerbated that we can't use exchange rate policy to influence its value in our domestic market. Some people may argue that we need to minimise imports from South Africa but that is only possible if our industry is able to produce sufficiently at relatively competitive prices," said Mr Gundani.

The economists noted that the declining inflation was a macroeconomic misnomer that required correction of other macroeconomic variables like aggregate demand and economic growth.
- sundaynews
Tags: Economy,


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