The leading economic adviser at global bond fund PIMCO has detailed ‘three gluts’ that will drive the global economy over coming years through an environment of low growth, low interest rates and low inflation.
Joachim Fels, a former chief economist at Morgan Stanley, noted a crucial interaction between a savings glut, money glut and oil glut in his first note since joining PIMCO in February, labelling the savings glut as the key to a global “deficiency of demand” and potentially a driver of asset bubbles.
“If governments fail to fill the demand gap with fiscal stimulus and central banks cannot push real rates significantly negative (due to the lower bound for nominal rates and low inflation), the economy remains lethargic and central banks have to blow pretty bubbles in the financial markets in order to avoid even worse outcomes,” he noted.
While this could be seen as “depressing”, Mr Fels noted a potential offset in the form of the oil glut, which is shifting income to those who are less likely to save.
“The oil glut helps to mitigate the depressing impact of the savings glut on consumer demand by shifting income from oil producers, who have a high propensity to save, to consumers, who typically spend most of their income,” he said.
This may take a while to flow through to the economy, however.
Likewise, the global money glut – which has come through central bank reactions to the savings and oil gluts – will eventually have a strong impact, even if it is not seen immediately.
“We expect more monetary easing to come, particularly in China and in many commodity-producing countries, so the global money glut, which is already increasing due to heavyweights like the European Central Bank and the Bank of Japan executing their asset purchase programs, will swell further.”
Combined the three gluts will have a profound impact on the global economy through the current cycle.
“While the global savings glut is likely the main secular force behind the global environment of low growth, lowflation and low interest rates, both the oil and the money glut should help lift demand growth, inflation and thus interest rates from their current depressed levels over the cyclical horizon,” he said.