The Decline in Prices is Raising Concerns in the U.K., While ZEW Survey Slips in the Euro Zone

The global recession that had hit economies last year is still having a negative effect on economic activities, especially in major economies. Perhaps one of the repercussions of the downturn is the downfall in prices which is threatening price stability and undermining the governments' coffers to jolt their economies out of the downfall before falling in a far-reaching calamity.

Despite the improvement seen in the second quarter of the current year, economies are still suffering and are in need of a strong government's intervention to shore up their economies. In the U.K., the economy shrunk 2.4%, the most since 1958 in the first quarter, due to the global slowdown which adversely impacted all sectors of the economy. However, in the second quarter the pace of contraction eased to 0.6%, signaling an overall improvement.

Nevertheless, the inflation rate has reached its lowest since the beginning of last year. In August, CPI slipped to 1.6%, lower than the prior of 1.8%; while on the month, it increased 0.4%.

Today, U.K. released its CPI for September, which came showing further deterioration coming in flat, worse than the prior and projected 0.4% and 0.3% respectively; while on the year it dipped to 1.1% from the previous 1.6%, while markets were anticipating 1.3%. Annual core CPI, which excludes food and energy prices came in at 1.7%, inline with expectations but lower than the preceding of 1.8%.

The rate plunged to the lowest level in 5 years as slower utility bills, food prices, and restaurant retreated. Electricity, gas, and other fuels fell 7.3%, the highest record since compiling data, according to the statistics office.

It seems that consumers' conditions are still deteriorating with the ongoing termination process by employers to cut expenses; where some households lost their income, while others lost a portion of it. Jobless rate climbed to 7.9%, signaling the highest since 1996.

Moreover, RPI for September slipped to 0.4% from 0.5%, yet higher than the forecasted 0.3%. On the year, it came in at -1.4% from -1.3%, while it was presumed to fall to -1.5%. RPI also excluded mortgage payments for the year ending in September, where it fell to 1.3% from 1.4% which is better than the predicted reading of 1.2%. 

Retailers slashed their prices, made promotions and offers to boost their sales and thereby profits to recover from the previous losses incurred on the back of the recession, which weighed on food and non food sales due to the decline in consumer's income.

The Bank of England previously expected that volatility is going to occur in the upcoming period. They predict that the rate will fall below 1% later during the current year, and may remain beneath the lower boundary the central bank's target in 3 years, as a consequence of the sluggish recovery steps the economy is undertaking.

Policy makers at the BoE slashed the key interest rate by 4.25% to a record low of 0.5% to revive the economy by enhancing spending. Also, they embarked upon methods of quantitative easing for the first time through purchasing gilts. The BoE raised 125 billion pounds to 175 billion pounds, after the success of the program in lowering the pace of contraction.

All in all, decelerating prices remain the most challenging mission facing the Bank of England in the coming period, due to the decline in domestic and global demand on products, which are adding more downside pressure on prices. In addition, oil prices started to retreat in September after reaching 10-month high near $75 a barrel. 

In the euro zone, the ZEW survey was released concerning the economic sentiment for October showing that it fell to 56.9 from 59.6, while markets were expecting 61.2. The decline was driven by the drop in the largest economy in the euro zone, Germany, where the reading regarding economic sentiment for October came in at 56.0, worse than the previous and expected readings of 57.7 and 58.8 respectively; whereas the current situation came in at -72.2 lower than the forecasted reading of -69.0, yet better than the prior reading of -74.0. The reading fell in Germany for the first time in 4 months. 

After the noticeable improvement witnessed at the beginning of the second quarter, due to the ongoing efforts by the ECB and national governments to halt the decelerating economic conditions, the reading slightly retreated today. But it will not impact the successful pace the euro zone has undertaken in the previous period, buoyed by the wise monetary policies adopted by the ECB.

The European Central Bank (ECB) has cut the borrowing cost to a record low of 1% and triggered a 60 billion euros plan on July 6, to provide markets with liquidity and reduce the decline in prices. The data shows that there is ongoing improvement in the economy, which indicates that a recovery could be witnessed in the region before other large economies.