Pimco says the risks have increased for an ‘anti-Goldilocks economy’ — where growth is too cold and inflation is far too hot
- The Ukraine war's impact on supply chains and trade could result in a global "anti-Goldilocks" economy, Pimco said.
- Higher energy prices could help lead to "stagflation", where inflation is too hot and growth is too cold.
The Ukraine conflict's impact on supply of key goods could easily result in a global "anti-Goldilocks" economy, where inflation runs too hot and growth is too cold, according to bond giant Pimco.
Russia's monthlong war on 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 confronted with a stagflationary supply shock that is negative for growth and will tend to push up inflation further," the Pimco team said in a note this week.
Concerns about supply have driven prices of commodities and energy to soar, and intensified an already uncertain economic and financial market outlook, weighed down by the coronavirus crisis.
Pandemic pressures meant inflation was running at historic highs even before the Russia-Ukraine conflict. The US Consumer Price Index, a closely watched measure of inflation, surged to 7.9% in February — a 40-year high.
Pimco noted four factors that could lead to stagflation, a 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 so less funding in the economy, and lower consumer and business confidence.
"In combination, these could easily result in what one participant at our forum called an 'anti-Goldilocks economy': an economy that will be both too hot in terms of inflation and too cold in terms of growth," its team said.
The strategists — global economic advisor Joachim Fels, and CIO for fixed income Andrew Balls — noted that while Pimco has revised its forecasts lower, it tentatively expects inflation to peak in coming months, then moderate gradually.
Pimco also forecasts growth of 3% for 2022, sustained by a return to normal and by people spending 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 the war or the sanctions escalate further," they said.
The Ukraine crisis has led to further disruptions just as some of the bottlenecks related to COVID-19 restrictions had started to ease, according to Pimco.
"While Russia only accounts for 1.5% of global trade, it has a much larger footprint in a range of energy and non-energy commodities," its team said. Meanwhile, Ukraine is a key supplier of grain, auto parts, and chip requirements such as neon.
"Given the complexity of global supply chains, seemingly minor shortages in certain raw materials and components can have an outsized impact on output and prices," they said.
Russia's invasion of Ukraine has been the biggest factor boosting inflation in the past few weeks. Initial fears of an attack hit crude oil and natural gas prices, and it has since driven up prices for wheat, nickel, and fertilizer.
Even once the war ends, sanctions will likely stay in place for a long time, according to Pimco. That will make supply-chain issues worse, and hinder the movement of trade and capital.
The firm suggested investors look to commodities as a way to lessen the risks from increases in inflation, because their prices may well rise due to buyers shunning Russian exports. US Treasury Inflation-Protected Securities (TIPS) are another option, they said.