Battening down for deflationary headwinds

The global economy teeters precariously on the edge says UBS Warburg''s chief economist, Paul Donovan. Will the Fed''s plan to bring it back from the brink work?

The theme of a lot of your research at the moment has been inflationary tailwinds and deflationary headwinds. How close is the world to entering a bad deflationary environment

Donovan The world economy is suffering from a lack of aggregate demand which means people aren't buying enough, or there is spare capacity. We expect this to continue for the next couple of years. Throughout 2003 and 2004 we expect the global economy to perform below trend and downwards pressure on prices will start to come through. The question is, does this downwards pressure on prices lead to a deflationary spiral like it in Japan It could, but we are expecting policy makers...

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