Deflation rears its ugly head in crisis-hit Asia

Deflation rears its ugly head in crisis-hit Asia

SINGAPORE (AFP): When Asian currencies hit record lows in mid- 1997, the region's economies were saddled with high inflation due largely to expensive imported items which the region heavily relied on.

Today, governments are grappling with crashing consumer prices.

After peaking in mid-1998, one year into the Asian currency crisis, prices plunged due to excess supply and sagging demand as people held the purse strings amid a gloomy environment of retrenchments and bankruptcies.

The plunge has not stopped and the region is now in a deflationary downturn so severe with the only precedent being the Great Depression of the 1930's.

China, Hong Kong, Singapore and Japan are already in deflation mode as their inflation levels have turned negative while many other economies in the region are gripped by disinflation bordering on deflation.

"To most people falling prices is a good sign but falling steeply and over a long period of time is counterproductive because businesses will not be able to meet costs, industries will grind to a halt, jobs are lost and wages drop," explained Eddie Lee, regional economist with Vickers Ballas investment house in Singapore.

"Governments have to fight deflation in the same forceful way they fight inflation," Lee said. "People should fear deflation as they dread inflation."

Most Asian governments are priming the pump or reflating their economies, including through massive public spending programs, to haul them out of recession.

Lee said the buoyant stock markets in recent days, if sustained, could help restore consumer spending and boost prices.

Global commodity prices are also at record lows.

Vincent Low, regional fixed income strategist with Merrill Lynch in Singapore, said the "cure" for deflation against the ominous backdrop of excess supply and falling prices was "destruction of old, inefficient plants and obsolescent technology."

"But there is great reluctance to do that in Asia because many of them are traditional family businesses and there is this refusal to change mindset," Low said.

French bank Societe Generale said in its latest research report: "Concerns about deflation exerting a long-term drag on Asia's growth have been raised because inflation is turning negative in many countries and excess capacity threatens to depress prices for some time."

But it said: "Our forecasts for inflation suggest that we are in a process of disinflation (a shift to lower rates of inflation), not a classic deflation (negative inflation rate)."

Citing China as an example, Societe Generale said reforms that had raised the prices of housing, medical and other services in the world's most populous nation meant that while prices of goods might be falling, services prices were rising.

"So what we have in China is not classic deflation but a rise in the relative prices of services in relation to goods prices," Societe General said in the report where China's inflation rate for 1998 was forecast at 0.7 percent, down from 2.8 percent the previous year.

Jimmy Koh, regional economist with British financial house IDEA, said many of the distressed economies were trying to export their way out of recovery to boost domestic consumption and investment which in turn could boost prices.

"The problem is that we are facing a global demand downturn, everybody is aiming for an export-led recovery but who is going to buy," he asked.

Latest official figures show that in Singapore, where the economy has contracted, consumer prices have dropped for the six straight month in November 1998, falling 1.5 percent over the same period the previous year.

The Singapore government said it expected zero inflation for 1998, down from its earlier estimate of 0.5 percent.

Recession-hit Hong Kong slipped into negative inflation for the first time in 23 years when the consumer price index fell 0.7 percent year-on-year in November.

In Japan, wholesale prices tumbled 4.4 percent in December -- the biggest dive in 11 years -- signaling deflation has gripped the world's second largest economy.