Greece enters deflation for first time in 45 years

Greek consumer prices fell year-on-year in March, taking the battered economy into deflationary territory for the first time since 1968.

By Denise Roland

1:58PM BST 09 Apr 2013

March prices slumped 0.2pc year-on-year, according to figures from the Greek government's statistical agency Elstat.

The fall was widely expected as a consequence of five years of unrelenting economic contraction in Greece, where GDP is 16pc smaller than it was in 2008, but could mark the beginning of a dangerous deflationary spiral for the fragile economy.

"Given the still dire economic environment, we expect consumer price inflation to remain negative during the rest of the year," said Diego Iscaro, Europe economist at IHS Global Insight.

"It's more of a surprise that it [deflation] did not happen sooner," said Ben May, Europe economist at Capital Economics, describing falling prices as a "double edged sword".

While deflation will come as good news for exporters and squeezed consumers, a sustained bout of falling prices will drive up the Greek debt burden, and could force its lenders to accept more losses.

"If you were to see several years of deflation, it would likely mean the government would have to undertake another debt restructuring," said Mr May.

Private investors suffered deep losses in December last year when they sold sovereign bonds back to the Greek government for about a third of their value, in order to give the island much-needed debt relief.

"There's not much more the private sector can do" in the event of further debt relief, said Mr May. "That implies that eurozone governments may need to accept haircuts on their debt, or relax returns on their loans. The ECB might have to take a hit on its debt holdings too."

Though three or four years of falling prices could plunge the Greek economy deeper into debt crisis, it could take even longer for Greece to regain the competitive edge needed for a recovery, he added.

"I'm not sure you can have a short term period of deflation and a pick up in exports," said Mr May, who noted that if Greece exited the eurozone it could boost competitiveness faster through currency adjustments.

"We think that Greece could eventually leave the eurozone. It's very difficult to solve these problems within the single currency."

Elsewhere in the eurozone, German trade slumped unexpectedly in February, in a signal the economic powerhouse may not be able to lift the single currency bloc out of slump. Imports, which were predicted to rise modestly, tumbled 3.8pc, while exports, expected to hold steady, slid 1.5pc.

In France, the central bank's preliminary estimate that GDP grew 0.1pc in the first quarter of this year. If confirmed by official data due in May, the figure would mean the bloc's second-largest economy, which shrank 0.3pc in the last three months of 2012, narrowly avoided entering its third recession since 2008.