Risk of Global Deflation Relatively Small, IMF Says
(Identifies countries that appear to be at risk)
19 May 2003

The International Monetary Fund (IMF) says that the risk of global deflation is "relatively small."

In a May 19 news release the IMF said, however, that in some large and small economies, including Japan and Germany, the risks of falling prices are increasing. The risks in the United States are characterized as "low, but not minimal."

The study, which covers a wide range of countries, suggests policies for averting deflation in countries where the risk indicator is high.

Deflation occurs when price declines are so widespread that broad-based indexes of prices, such as the consumer price index, register ongoing declines stemming from a dramatic drop in aggregate demand. Deflation can cause recession, financial stress and a rise in unemployment.

Following is the text of the IMF release:

The International Monetary Fund
May 19, 2003

The International Monetary Fund (IMF) staff is today releasing a study of deflation based on a novel framework applied systematically to a wide range of countries. The study comes to the conclusion that there is only a relatively small risk of global deflation. But there are high and increasing risks of falling prices in some major economies, and in many smaller ones.

The United States is categorized in the low, but not the minimal, risk category. Deflation is unlikely unless unemployment reaches 8 percent and/or if GDP [gross domestic product] growth remains below 1 percent over the next eighteen months.

There is a high risk that deflation in Japan could accelerate from the current rate of ½ to 1 percent to 2 percent or higher if the unemployment rate were to increase from 5 ½ to 6 ½ percent, or if GDP growth were to remain flat over the next year.

Germany is ranked in the high risk category. If GDP growth turns out to be as projected (at ½ percent, April World Economic Outlook) the probability of deflation taking hold over the next year is considerable. If the economy has negative growth, the risks will rise significantly.

Belgium, Finland, Norway, Portugal, Sweden and Switzerland are in the moderate risk category, even without factoring in the possible spill-over effects if deflation occurs in Germany.

Emerging market countries with low, but not minimal, risk include Korea, India, Mexico, Poland and Thailand. China, which has mild deflation, reflecting mostly increasing productivity growth, is also ranked in the low risk category. But there are risks of increasing deflationary pressures given excess capacity in state-owned enterprises. Growing exports from China have added to price pressures in many sectors world wide and these pressures are set to increase.

The study shows that averaged over the past three years, 16 percent of the industrial countries and 26 percent of the large emerging market economies have experienced periods of virtual deflation (given the upward bias in measured inflation rates, this is defined in the WEO as annual inflation of less than 1 percent).

The study examines the costs of deflation and puts forward a range of policies for proactively averting it in countries where the indicator of risk is high. It also discusses policies for dealing with deflation once it has become entrenched.

The study reports the findings of an interdepartmental task force on deflation. It was prepared under the general direction of Kenneth Rogoff, Economic Counselor and Director of Research (krogoff@imf.org). The task force was headed by Manmohan S. Kumar, Advisor in the Research Department, and comprised Taimur Baig, Jörg Decressin, Chris Faulkner-MacDonagh, and Tarhan Feyzioglu.

The study can be viewed at http://www.imf.org/external/pubs/ft/def/2003/eng/043003.htm

(Distributed by the Bureau of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)