Henar Fuentes held out the white cardigan sweater as if she wanted nothing more in the world. It was on sale for 8.45 euros ($11.44) at a Madrid boutique just a few minutes’ walk from the Puerta del Sol.
“I never looked at prices when the going was good but now I have to,” said the 63-year-old, who cleans houses for a living. “When prices go down like this, it encourages you to buy something even if you don’t really need it.” She put the sweater over her arm to keep it from others, and kept rummaging.
Fuentas’s good fortune highlights the potentially positive impact of falling prices in some crisis-hit euro countries. While deflation has scarred Japan’s economy for two decades, European Central Bank President Mario Draghi said last month he sees no parallels to that in the 17-nation bloc, adding that some price adjustments are “welcome.” He spoke after the bank cut its benchmark interest rate to a record low of 0.25 percent.
With inflation in the euro area close to a four-year low in November, consumers in the countries that have most suffered from the longest recession in the region’s history are enjoying lower costs for items such as household equipment or communications.
“There are nothing but benefits,” said Madrid-based Angel Laborda, a former head of Spanish government forecasting who is now chief economist at Funcas, the country’s savings banks’ foundation. “Prices are finally reflecting lower income and it is stimulating demand.”
The ECB will again face up to the potential for European deflationary risks when it meets tomorrow. Draghi will present updated inflation forecasts and unveil a first estimate for 2015 showing how serious the threat of broad price declines may be. All 60 economists surveyed by Bloomberg News predict policy makers will keep borrowing costs unchanged.
October reflected a milestone: For the first time in the single currency’s history, the euro area’s average inflation rate, of 0.7 percent, fell below Japan’s, where officials have fought deflation for the past 15 years. Price growth reached 1.1 percent in October as the Bank of Japan’s pledge to buy more than 7 trillion yen ($68 billion) of government bonds each month helped revive inflation expectations.
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“This isn’t a Japanese-style deflation yet,” said Ludovic Subran, chief economist at Euler Hermes, a Paris-based credit insurer. “What we have is a euro-zone disinflation, with much stronger pressures in non-core countries.”
In October, prices fell in Greece, Cyprus and Ireland and were flat in Spain and Portugal. By contrast, they rose 0.7 percent in France and Belgium, 1.2 percent in Germany and 1.5 percent in Austria. Clothing prices fell by 4.1 percent in Ireland and 2.8 percent in Portugal while going up 0.5 percent in the region.
In Greece, Sotiris Saidis is already seeing the benefits of lowering rates at the hotel he owns on the island of Hydra in the western Aegean Sea. More tourists arrived from Germany during this year’s season, he said, after a “terrible” 2012. They were lured in part by tariffs that have fallen by as much as 40 percent since 2011, and enough came that his revenue rose this year.
A room that rented for 70 euros a night in 2001, when Greece joined the euro, now goes for 65 euros a night -- one sign that hotels are subjected to more pressure than other parts of the tourist sector, Saidis said.
“At a restaurant you may sometimes take a glance at the menu before sitting down, but mostly you sit down without looking,” he said in a phone interview. “We’re constantly getting phone calls with people saying ‘how much?’ We’re under constant scrutiny and it pushes prices downward.”
Falling prices haven’t reversed the trend in retail sales. Weakness in the so-called peripheral countries has pushed euro-region retail sales down 2 percent since 2010. The declines were 21 percent in Greece, 14 percent in Spain and 13 percent in Portugal, offsetting rises in France and Germany.
“Downward pressure on prices in countries such as Greece and Spain reflect prolonged weak growth or recession,” said Sarah Hewin, head of research at Standard Chartered Bank in London. “There could be a deflation risk. There is a lot of spare capacity in the euro-area economy and the recovery is slow and patchy.”
Laurent Freixe, executive vice-president of Nestle SA, the world’s biggest food company, echoed that concern in an Oct. 17 conference call with investors. The company is seeing “deflationary tensions” in Europe, “so everyone is fighting for a share of a shrinking pie.”
Still, there are signs of stabilization. Sales rose in Portugal in October for the first time since August 2010. In Ireland, sales fell 0.9 percent the same month after rising for three straight months. In Spain, a 0.5 percent drop in October followed a 2.1 percent increase in September, the first since June 2010.
Falling prices are driven in part by lower labor costs, feeding into a rebalancing of output at lower levels, said economist Francois Cabau at Barclays Plc. A Eurostat index shows labor costs dropped 15 percent in Greece between 2008 and 2012 and 7 percent in Portugal. Over the same period they rose 9 percent in Germany and 13 percent in Belgium.
In Spain, households’ average income fell for a fourth year to 23,123 euros per year in 2012, with more than one-quarter of the work force jobless. That compares with an average 25,556 euros at the start of the crisis in 2008, according to the National Statistics Institute. More than 20 percent of the population lives under the poverty threshold.
“The fall in wage growth and price inflation is one aspect of the necessary adjustment,” Goldman Sachs Group Inc. analyst Andrew Benito wrote in a note to clients today. Spain will “avoid outright deflation” while its labor market reform “has proved successful in enhancing wage flexibility.”
“Wage moderation is good for the Spanish economy at the moment,” Deputy Trade Minister Jaime Garcia-Legaz Ponce said in Madrid on Nov. 20. “Spain is achieving an internal devaluation, which is much tougher and complex but has the advantage of being permanent” when compared with a currency devaluation, he said.
In Greece, where average household disposable income has shed 35 percent since 2009, prices started falling in March for the first time since 1968. Veropoulos, the Greek unit of the Spar chain, is advertising discounts of as much as 40 percent for products such as branded shampoo, cheese and toothpaste.
“The purchasing power of incomes is improving, making the wellbeing of households a bit better,” said Tassos Anastasatos, an economist at Eurobank Ergasias SA in Athens. “Falling CPI improves the competitiveness of service-oriented sectors.”
Back in Madrid, it took a price cut of more than 50 percent to get Beatriz Garcia Prieto to go the cinema last month. Garcia Prieto, a 41-year-old freelance TV producer, hadn’t been to the movies for more than a year but was lured to Woody Allen’s “To Rome with Love” by tickets that cost 3.50 euros instead of the standard 9 euros. A similar nationwide offer the previous month doubled Spanish cinema attendance over three days.
“People have less and less money and they’re simply not going to buy unless prices come down,” said Garcia Prieto, adding that she didn’t expect the discounts to stick. “Prices aren’t really going down. You’ll only see special offers for some products.”
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