Ahead of the ECB meeting tomorrow Azad Zangana, Schroders European Economist, comments on how low inflation in the Eurozone is becoming a serious risk that could lead to deflation.
"Low inflation in the Eurozone is becoming a serious risk that could lead to outright deflation. We have recreated the IMF's deflation vulnerability index which suggests that risk is now 'high' for the Eurozone in aggregate (chart below).
"While our central view is that Europe will not experience a Japanese-style episode as recovery continues, we cannot ignore the warning signs that the risk of deflation is escalating. Deflation or even prolonged very low inflation could cause many governments' balance sheets to become unsustainable. The tail risk is growing, but is the ECB paying attention?"
To view the full viewpoint piece from Azad Zangana on the Rising Risk of European Deflation please click on the attached pdf – Rising Risk of European Deflation viewpoint