What It Means For Global Economies & Corporates
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WHO’S MOST AT RISK?
Which sectors of the economy are most threatened by deflation? The list is long, according to Kevin Logan, chief US economist for HSBC.
As he sees it, the first victims are consumers and companies in debt, as deflation increases its value while hurting their ability to service it. Retailers holding inventory also suffer, says Logan, as its value declines. Third, he says, industrial and commercial companies find themselves at risk, as producers of capital goods see their prices fall faster than wages.
That’s already been seen most clearly, he notes, in the oil sector and among suppliers to the industry, such as steel companies and capital goods makers. Caterpillar, for example, recently forecast that its revenues in 2015 would decline by 9% from last year’s because of the decline in oil prices. In addition, says Logan, producers of final products begin to suffer as their inventories become worth less.
Finally, deflation hits banks as they experience loan losses and can’t provide credit even to good borrowers. Logan notes that the same thing can happen in recessions. But with deflation, he says, the effect is “slower and more prolonged.” What can companies themselves do about deflation? Reducing prices may help them become more competitive and gain market share, but margins will suffer, as wages are slower to fall. And so the move ultimately eliminates profits.