Text on screen: PIMCO
Photo of Joachim Fels in PIMCO studio
Text on screen: Joachim Fels, Global Economic Advisor
Fels: Normally big, macroeconomic events like this shock, this recession, tend to accelerate trends that were already in place before. So they serve as a catalyst, and we think this time will be no different. So what are these trends that are likely to be accelerated by the crisis? Let me mention five of them very briefly.
Text on screen: TITLE – Five characteristics of a post-COVID world , BULLETS – Deglobalization, Income and wealth inequality, Private sector saving glut, Monetary and fiscal policy cooperation, Lower interest rates
The first one is deglobalization. That was something that was already in motion before this crisis. We had a trade war. We saw many companies trying to bring some of the global supply chain, closer to home. We think this trend will accelerate, and, as I mentioned earlier, we may even see more protectionism coming in.
The second trend that is likely to be accelerated by the crisis is inequality, both income and wealth inequality. Crises like these recessions usually hit the weakest parts of society most. So this true for, say, low-income individuals.
This is true for small- and medium-size enterprises, and inequality within the household sector and within the corporate sector is likely to increase more and is likely to be more persistent.
The third trend that we think will accelerate is the private sector saving glut. Households will be more cautious in terms of their consumer spending. They will want to hold higher precautionary savings, and this will be a welcome offset to the higher public sector deficits that we are likely to see, which brings me to the fourth trend.
That is the closer cooperation of monetary and fiscal policy. That was something that was already underway before the crisis, but it's likely to intensify. We are seeing governments and central banks working hand-in-hand, central banks helping governments to absorb all the additional debt that needs to be issued, and this is something that is likely here to stay.
And then the fifth trend that we think will be accelerated by this crisis is the trend towards lower and lower interest rates, both nominal and real interest rates. Even before the crisis we had been talking about the new neutral of lower-equilibrium interest rates for quite some time.
We think we're now heading into what we would call the new neutral 2.0, which is a world where nominal, and even more so real interest rates and bond yields, will prevail for a prolonged period of time.
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