Pimco warns of ‘anti-Goldilocks economics’ of hot inflation, cold growth

  • The impact of the Ukraine war on supply chains and trade could result in an “anti-Goldilocks” global economy, Pimco said.
  • Higher energy prices could help lead to “stagflation,” where inflation is too high and growth too cold.
  • Even once the war is over, sanctions are likely to linger and worsen supply chain and trade flow problems, they said.

The impact of the Ukraine conflict on the supply of key goods could easily result in an “anti-Goldilocks” global economy, where inflation is too high and growth is too cold, according to bond giant Pimco.

Russia’s month-long war against Ukraine and the intense Western sanctions imposed in response have disrupted supply chains and trade flows, its strategists said.

“The global economy and policymakers are facing a stagflationary supply shock that is negative for growth and will tend to further drive up inflation,” the Pimco team said in a note this week.

Supply concerns have pushed up commodity and energy prices and intensified an already uncertain economic and financial outlook weighed down by the coronavirus crisis.

The pressures of the pandemic meant that inflation was reaching record highs even before the conflict between Russia and Ukraine. The US Consumer Price Index, a closely watched measure of inflation, rose to 7.9% in February – a maximum of 40 years.

Pimco pointed to four factors that could lead to stagflationa combination of stagnant growth and high inflation in the same period.

These are higher food and energy prices, disrupted supply chains and trade flow, less spending and therefore less financing in the economy, and lower consumer and business confidence.

“In combination, this could easily result in what one participant in our forum called an ‘anti-Goldilocks economy’: an economy that will be too hot in terms of inflation and too cold in terms of growth,” his team said.

The strategists, global economic adviser Joachim Fels and fixed income CIO Andrew Balls, noted that while Pimco has revised its forecasts down, it tentatively expects inflation to peak in the coming months and then gradually moderate.

Pimco also forecasts 3% growth by 2022, sustained by a return to normalcy and by people spending their savings after the pandemic.

“However, there are obvious and significant downside risks to this growth baseline and upside risks to the inflation outlook, especially if war or sanctions escalate further,” they said.

The Ukraine crisis has led to further disruption just as some of the bottlenecks related to COVID-19 restrictions began to ease, according to Pimco.

“While Russia only accounts for 1.5% of world trade, it has a much larger footprint across a range of energy and non-energy commodities,” his team said. Meanwhile, Ukraine is a key supplier of grain, auto parts, and chip requirements like neon.

“Given the complexity of global supply chains, seemingly minor shortages of certain raw materials and components can have a huge impact on production and prices,” they said.

Russia’s invasion of Ukraine has been the most important factor driving inflation in recent weeks. Initial fears of an attack hit crude oil and natural gas prices, and have since pushed up prices of wheat, nickel and fertilizer.

Even once the war is over, the sanctions are likely to be in place for a long time, according to Pimco. That will worsen supply chain problems and hamper the movement of trade and capital.

The firm suggested investors look at commodities as a way to lessen the risks of rising inflation, because their prices could rise as buyers shun Russian exports. US Treasury inflation-protected securities (TIPS) are another option, they said.

Read more: BlackRock says it still favors equities despite rampant inflation because the Fed’s ‘tough talk has little bite’ as strategists at the $10 trillion firm reveal their top 3 investment themes right now.

Previous post The market is showing a buy signal that suggests shares will rise one last time before an ‘epic’ selling opportunity in the second quarter, says Bank of America.
Next post How to be in better financial health in 2022 – Forbes Advisor INDIA
%d bloggers like this: