Deflation accelerates – a dangerous Game

Zimbabwe’s deflation accelerated to 0.19% year-on-year in May from 0.26% in April, the national statistics agency Zimstats said on Monday.

On a month-on-month basis, prices fell by 0.13% in May after increasing by 0.58% the previous month. When Zimbabwe recorded deflation in February, Godfrey Kanyenze, director of the Labour and Economic Development Research Institute of Zimbabwe, said it is a reflection that there is dampened economic activity. “There is hardly any major economic activity taking place. Fewer people have money to buy the available goods and services. We really need to come up with fiscal stimuli to whip up demand,” he told AFP at the time.

Sustained deflation can be dangerous for an economy as a widespread decline in prices may lead to consumers delaying purchases. It can trigger a destructive spiral where companies forced to cut prices also cut wages and lay off workers, leaving consumers with less money to spend and the entire economy worse off.

Kanyenze said the country needs to attract more foreign investment and boost mining and agriculture exports, but its risk profile is keeping investors away. Most Zimbabweans have little disposable income, which translates into low aggregate demand for goods and services. This is pressing on employment, rather than consumers holding off on purchases.

Zimbabwe’s economy has been on a downturn for over a decade, with most people living below the poverty line and firms either downsizing or pulling down the shutters. But economists estimate the country is only running at a third of its current capacity.

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