Deflation dangers cast shadow over recovery

The European economy looks set for another year of weak growth in 2014, with the euro-zone likely to do little more than stagnate. Against that background, the European Central Bank (ECB) is likely to take further policy action, perhaps including the belated adoption of quantitative easing, in an attempt to support the region’s fragile recovery and head off deflation risks. But while negative inflation may be avoided at the aggregate level, sharp falls in prices in some of the heavily indebted peripheral economies will hinder their fiscal consolidation efforts and maintain the danger of a renewed bout of market instability.