Deflation threat looms as global demand weakens

THE dampening effect of deflation on consumer spending, business investment and employment could jeopardise the economic recovery, a new report out today says.

Weakening global demand caused input prices for businesses to take another step towards deflation in October, according to the latest Business Trends report by accountants and business advisers BDO in Yorkshire.

The BDO Inflation Index, which predicts businesses’ cost expectations over the next three months, fell for the sixth consecutive month in October to 96.2.

This is just above the 95.0 mark, below which indicates an inflation rate of zero. Based on the current trend, BDO’s Inflation Index will turn negative in February 2015.

BDO’s Index tracks factory gate prices, but inflation for consumers is also at historically low levels. Price increases for household goods slowed to 1.2% in the year to September. Were deflation to set in, its dampening effect on consumer spending, business investment and employment could jeopardise the economic recovery, the report warns.

Terry Jones, partner and head of BDO in Yorkshire, said: “The global economy has slowed and as a result we could become caught up in the same deflationary conditions the Eurozone is currently experiencing. Policymakers need to realise that there are far more significant downside risks for growth than there were three months ago.

“Housing market controls look to have done their job, but interest rate rises should certainly be put on hold. The government’s intentions to boost infrastructure spending are also welcome but more could be done.

“The ongoing discourse about creating a northern powerhouse to rival London indicates that the Government is thinking along the right lines, but we could do with more of this sort of thing in the upcoming Autumn Statement.”

In spite of deflation threats, businesses remain confident in their growth expectations for the coming three months. The BDO Output Index remained well above the 100 mark that represents long-term trend growth at 103.2 in October.

In addition, the BDO Employment Index rose again in October to reach 113.4, up from 112.3 in September. This reflects businesses’ plans to increase hiring over the next three months in response to strong domestic demand and weak wage growth.