The world economy remains mired in the doldrums. The outlook has hardly improved in spite of an optimistic economic assessment from the Group of Eight summit in Evian, France. Two specters loom over the horizon: global deflation and a weaker dollar. Leaders of the world's top industrialized nations, anxious to provide hope and confidence, all but ignored these anxieties.
The chairman's summary statement issued at the end of the meeting said nothing about these concerns. Instead, it said "major downside risks (for global growth) have receded and the conditions for a recovery are in place," and that "we are confident in the potential of our economies." The statement is heartening as far as it goes, but it also betrays an unwillingness to look at the flip side of the global economy.
Deflation is not a reality except in Japan, but its risks appear to be growing in other countries. In the United States and Germany, for example, inflation rates are falling -- a situation known as disinflation. The possibility is that over time this might lead to deflation -- a general decline of prices that may adversely affect output and employment, as it already has done in Japan.