Global economic growth is being constrained by investors' habitual fear of another financial crisis, according to Principal Global Investors.
A negative feedback loop has stymied investor confidence, Principal Global Investors chief global economist Bob Baur said, leading to a number of flow-on complications for markets.
“It created intense demand for safe-haven assets like U.S. treasury bonds, so interest rates would likely be ultra-low even if the Fed were not pressing yields down with its past bond purchases.
“It means that investors want income from stocks, cash in the ‘here and now’ rather than price appreciation that may or may not come in an uncertain future,” Mr Baur said.
The cost of retirement has also increased against the backdrop of low interest rates, leading households to “worry about not having enough money” and subsequently avoid spending in order to save.
“Stock prices are in record territory, house prices have recovered dramatically, and household net worth is far in record territory; but antsy consumers won’t spend that appreciation so the wealth effect isn’t working,” Mr Baur said
The US Federal Reserve’s (Fed) repeated decisions to keep interest rates on hold to avoid suppressing growth through a premature rate hike further contributed to investor fears, Mr Baur said.
“Persistently low yields make people think something is desperately wrong. A lack of rate hikes suggests the Fed has no confidence in the economy,” he said.
“This reinforces existing negative feedback, promotes more savings, discourages workers from re-entering the work force, and keeps capital spending way below trend.”
Mr Baur said breaking this cycle of negative feedback would require a quickening in the pace of wage growth coupled with a pick-up in interest rates, both of which he said are coming.
“The severity of the financial crisis enveloped many with a habitual fear of relapse, but the negative feedback engendered by that angst should fade as the expansion picks up a bit of steam,” he said.