Price cuts put eurozone at deflation risk

Weak consumer spending and intense competition among retailers are forcing some makers of packaged goods to lower their prices, intensifying the threat of eurozone deflation.

Annual inflation is running at just 0.5% in the currency area, well into what the ECB has described as a “danger zone” below 1%, and could fall further when figures for July are released later this week.

The ECB has said it sees no signs that financial markets or consumers expect a prolonged period of prices falling across the economy — as Japan experienced in its “lost decade” when people deferred spending in the knowledge that goods and services would get cheaper — thereby creating a downward economic spiral.

Yet some signs of deflation are already evident in corporate earnings results, as retailers and consumer goods manufacturers struggle with consumers’ reluctance to spend freely.

The evidence points, at least, to a prolonged period of what economists have called ‘lowflation’, which would be likely to curb economic recovery.

“Spending is much more targeted, more thought through,” said Ed Hudson, consumer products leader in Britain for professional services firm EY.

“It is very hard for the consumer packaged goods companies to put up prices, or indeed offer great big volume discounts.”

Unilever, maker of Dove soap and Ben & Jerry’s ice cream, reported a 1.9% fall in its European pricing in the second quarter ended on June 30, as declines in Germany, France and the Netherlands, offset increases in Spain, Italy and Greece.

“There are two stories taking place in Europe,” said its chief financial officer Jean-Marc Huet, referring to how the southern countries — which were harder-hit by the eurozone crisis — were now seeing some rebound.

That fits with recent signs of economic recovery in Spain and even Greece, while the French economy is flatlining, the Netherlands contracted in the first quarter, and the Bundesbank forecasts the German economy achieved no growth in the second three months of the year.

Companies such as Unilever have been pressured by the success of discount retailers Aldi and Lidl, which have also eroded sales and profits for retail rivals.

“Generally the European market is still in the deflationary stage for most household and consumer staples goods,” said Fintan Ryan, an analyst with Berenberg Bank.


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