Eurozone economy collapsed into deflation in August.

Karim Yousfi, Chief Global Strategist at Audacity Capital, commented:

“This is no teetering on the edge of the abyss – it’s a headlong plunge right over the edge.

“Deflation could soon prove the most serious threat to the Eurozone’s battered economy. The trouble with deflation is that not only is its danger insidious and hard to spot, but it also has the power to turbocharge the other two big threats – falling output and rising unemployment.

“Faced with falling prices, consumers tend to hold off on buying things in the hope of securing a discount in future. Every deferred purchase is one less sale for Europe’s struggling companies, many of whom are still enduring demand well below its pre-Covid level.

“Meanwhile the rising number of unemployed Europeans means the chances of Eurozone consumers spending their way out of the current crisis are getting slimmer by the day.

“The European Central Bank now has another potentially existential threat to tackle when its Governing Council meets next week to set its monetary policy.

“It has already gone ‘all in’ to prop up the Eurozone – slashing interest rates deep into negative territory and pumping colossal sums into the economy – leaving it precious few cards still to play.

“With the Eurozone sliding into deflationary territory even in the face of all that money-printing, the ECB has a real problem on its hands.

“ECB President Christine Lagarde now faces another ‘whatever it takes’ moment as the Covid crisis moves into a new chapter that will roil not just the equity markets but the Eurozone as a whole.”