Moderate optimism of one of the authoritative voices of the world’s largest fixed income manager, Pimco. The global economic advisor of the Californian firm, Joachim Fels (Baumholder, Germany, 59 years old), believes that the damage of the omicron variant will be less than in previous waves; bets on a relaxation of the global bottleneck in supply chains this 2022; and it scares away the specter of public debt in rich countries, which will moderate in an environment of inflation, low interest rates and GDP growth.
Ask. After a turbulent 2020 and 2021, what can we expect for this year?
Answer. In the short term I am optimistic. In 2022 we can expect growth above trend [de los últimos años] because we are still reeling from what has been the biggest recession of the modern era. The road, of course, is going to be bumpy, especially with the resurgence of the virus and new variants, particularly in Europe, where a rather weak winter can be expected. But I think it will be temporary.
P. What about inflation?
R. It is still very high, but will moderate over the course of 2022.
P. Is it pointing, then, to the thesis that the rise in prices is a temporary phenomenon?
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R. In the US, inflation will peak in the first quarter of 2022 and then fall to close the year close to the target [de la Reserva Federal, 2%]. The main reason is that bottlenecks will be undone and demand for products will slow as fiscal support programs expire. There are very few signs that the current high inflation is fueling long-term expectations. The eurozone is a good example of this: the price increase will be below the 2% target in the second half of 2022.
P. Prices, then, worry him less in the euro zone than in the US.
R. That’s how it is. First, because the recent history of low inflation in Europe has helped anchor expectations below that of the US Second, because the fiscal stimulus, while large, has been much less. In the US, activity has already returned to pre-pandemic levels, while the euro area is still significantly below and its labor market is less tense.
P. The omicron variant has triggered fears. Not only in health, but also economically.
R. We must be humble: at the moment we know very little. But if it is confirmed that, despite being more contagious, it produces less severe conditions, the impact should be temporary and relatively limited. The economic impact of each new wave will be less thanks to the reinforcement in vaccination. Although the covid will not go away completely, each time it will be a lesser burden on the economy.
P. One of the biggest headaches in 2021 has been the global bottleneck in global supply chains.
R. The bottlenecks will continue for some time, but there are two reasons to think that they will relax over the next year: investment is being significant, especially in the semiconductor sector, and demand will focus more on services and less in products. Both factors should ease them, as should inflation. And, of course, they will help the economy grow.
P. And the energy?
R. It is a significant concern in the immediate future, especially in Europe, where we are seeing very high electricity prices and there may be specific moments of natural gas shortage. Much will depend on how cold it is this winter. But it is, without a doubt, a key risk on the economic horizon.
P. Some investment banks warn that after the collapse of growth in 2020 and the rebound in inflation in 2021, in 2022 we will suffer a shock from higher interest rates.
R. It is a risk, but it is not our central scenario. The markets already have the rate hike path announced by the Fed incorporated into their price, so there should be no shock. This does not mean that there cannot be an overreaction, especially if inflation remains at high levels. In Europe the story is another, completely different: it is very, very unlikely that the ECB will raise rates in 2022. They will wait until 2023 or beyond.
P. Stocks are still near highs. Do you still see potential?
R. We will see more profits throughout 2022, although less than those registered in 2021. Corporate profits will continue to grow strongly, and that will continue to drive the stock markets.
P. Will they continue to prioritize US actions over European ones?
R. Yes, although not as much as in the past: big technology [que cotizan en Nueva York] they usually don’t do well when, like now, interest rates go up. So we don’t think the performance gap between US and European decks is going to be that pronounced.
P. There are those who fear a reissue of the taper tantrum (negative reaction in the market due to the withdrawal of stimuli) of 2013 in emerging markets: that the rise in interest rates in the US causes a capital outflow from middle-income countries.
R. The risk is lower than then: many of these countries have reduced their exposure to dollar-denominated debt. My concern is not so much for a taper tantrum caused by the Fed, but by domestic problems in some emerging countries: to reduce inflation. Their central banks have had to raise rates quite aggressively and this will affect growth in 2022. The second source of concern is political: there will be elections in many of these countries and that adds an additional dose of volatility. And the third is China: its growth is slowing down and it can be a problem for many emerging economies.
P. The combination of inflation and economic growth was key in the sharp reduction in public debt after the Second World War. Will history repeat itself?
R. I do not think we will see inflation as high as then, but the real interests faced by states will continue to be significantly below GDP growth. As long as that happens, hopefully the debt will stabilize or even fall. We can be reasonably optimistic, especially in advanced economies, and particularly in Europe.
P. Has Europe learned the lesson of austerity, after the mistake of a decade ago?
R. I think so. If you apply it too early, you kill growth and end up with an even bigger fiscal problem. I don’t think we will see a repeat of austerity as severe as the one we saw after the Greek financial crisis. Governments will be more patient.