Thoughts on European Macro Q4

I woke up one morning a fortnight ago with the word “Deflation” ringing in my ears wondering what that might mean for our portfolio? When the figures subsequently came in for the Eurozone at -0.3%, markets seemed to shrug it off. But negative CPI is actually a very bad thing if prices are falling, because people defer purchases, which lowers the overall level of demand, which results in falling production with a knock-on effect on employment, resulting in a downward deflationary spiral with potentially lost decades for stocks, as in the case of Japan. The range within the reported Eurozone CPI was wide, with Greece, the worst affected at -2.3% and France at 0.0%, the best. Germany was -0.4% and Italy -1.0%. Oil was a big negative contributor, for obvious Covid 19 related reasons. Clothing was negative, food positive but services were barely positive.

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