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By Benedicte Gravrand, Opalesque London:
In its excellent May-09 quarterly review entitled "Creative destruction", Thomas Della Casa's research team at Man Investments notes, among other things, that as world trade is shrinking at the fastest pace since WW2 with no quick recovery in sight, it is likely that deflationary forces would persist for some time.
The team's analysis shows that the most probable outcome for now is very sluggish growth for the foreseeable future, even over the next two to three years, with relative price stability on a global scale.
"Regions with stronger deflationary tendencies like the US or Japan will compensate for those with higher inflation like Latin America or Eastern Europe," the report says. "At the moment we cannot completely exclude a prolonged period of deflation tagged to stagnation in some important economic regions. Stagflation describes a very negative setting in which lower prices do not trigger much interest by the consumers. In such an environment governments will try to turn the deflationary psychology into an inflationary psychology for instance by introducing inflation targets."
The best economic scenario would be reflation, i.e. a return to modest inflation. The team thinks it is too early to worry about inflation now but it could become a serious issue down the road.
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