Europeans confident growth will return and deflation will end

 
Tim Wallace
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THE ECONOMIC climate in Europe is improving rapidly, according to the influential Ifo survey published yesterday.

Despite the Greek negotiations and the war in Ukraine, the Ifo’s index monitoring the economic climate improved from 102.3 to 112.7 in the past quarter.

The sharp rise takes the index firmly above its long run average of 106.1 points. The index measuring expectations of growth also climbed, up from 100 to 109.8.

Respondents also believe the current bout of flat or falling prices will not suck the Eurozone into a deflationary spiral.

The survey showed inflation is expected to come in at 0.7 per cent in 2015, before accelerating to 1.6 per cent in three to five years’ time.

Even in Greece, which is suffering most from a terrible GDP performance, prices are only expected to fall by 0.2 per cent this year before rising again by 1.2 per cent in the near future.

Expectations are important for policymakers, individuals, and businesses. If they expect prices to rise steadily at the European Central Bank’s target – below but close to two per cent per year – then they know how to price products and pay staff.

But if price expectations vary more widely, it can result in inflationary spirals, where prices and wages rise solely in anticipation of inflation, or a deflationary cycle where firms and households cut back on spending in the hope of buying when prices are lower.