The global economy will continue to feel the "aftershocks" from the pandemic, the war in UKraine and central bank policies for years to come, according to Richard Clarida, global economic adviser at Pimco.
Clarida said: “The first few years of the 2020s have seen a number of acute economic, financial and geopolitical disruptions on a worldwide scale, and it will take time for the ultimate consequences of these shocks to be fully felt.”
He said that these seismic events were happening alongside central banks ending their programmes of quantitative easing. QE structurally reduced volatility in global financial markets, so its ending naturally increases future levels of volatility.
But he warned that events such as the pandemic and the heightened geo-political uncertainty would “reverberate” for years to come, creating extra volatility.
Additionally, with policy makers also scarred by the impact of higher inflation, and governments constrained by high debt levels, institutions will be less able to shield populations from the consequences of this volatility.
Clarida noted this would lead to “more frequent and more volatile business cycles”, which had implications for investors.
He also feels the outcome of the current economic conditions, will mean that over the next five years economic growth will be slow in developed markets.
“We anticipate an era in which constraints on supply – not just shortfalls of demand – and enduring post-pandemic labour market shifts become significant sources of economic fluctuations, and continue to put upward pressure on global price levels.
"While we broadly share the prevailing view that global growth on average will disappoint, compared with the pre-pandemic experience, we also believe that the risks to growth are skewed decidedly to the downside.”
Gavyn Davies, chairman of Fulcrum Asset Management, said economic activity had been stronger in most parts of the developed world in 2023 than was expected, mostly due to the resilience of the services sector of economies, but he was most concerned about the outlook for the Eurozone right now.
This is because this is the one major developed market where the economic data is showing a slowdown rather than an improvement.
In terms of what all of this means for investors, Clarida said the bond yield curve was presently inverted, which implied that investors expected rate cuts and lower inflation for longer.
But in his view, investors will soon realise that inflation will be higher in future than they have been used to in recent years and this will lead to higher yields for long duration assets, than is currently the case.
As yields rising means prices falling, Clarida believes that long duration bond prices could fall from here, which is something that may be counter-intuitive, as investors concerned about the economic outlook would historically buy long-dated bonds.
But Clarida's view is that while the economy may deteriorate, inflation will persist, and in his view long-dated bonds don't particularly price that outcome in right now.
David.Thorpe@ft.com
