22-09-2017 · 5 年展望

Secular stagnation is a stagnating theory

Is secular stagnation for real? Although a number of arguments for it hold water, their influence has diminished, says Lukas Daalder in Robeco’s new five-year outlook.

The phenomenon occurs when a range of factors cause a breakdown in the relationship between savings and investment, and hasn’t been seen since the ‘lost decade’ in Japan in the 1990s. Left unchecked, it leads to economic stagnation.

“If secular stagnation really exists, the current economic rebound will only be a temporary episode; a mere blip, forgotten by next year,” says Daalder in Expected Returns 2018-2022. “If this is the case, bonds will continue to surprise positively, while risky assets will become vulnerable.”

“If, on the other hand, the whole thing is a misconception based on an unfortunate string of cyclical headwinds rather than a structural phenomenon, the opposite will apply. Assessing the case of secular stagnation is therefore worthwhile, especially in a five-year context.”


Is secular stagnation just a string of unfortunate mishaps? Source: Robeco, IMF

Potential causes

So what is secular stagnation? The main symptom is that there is a mismatch between investments (too low) and savings (too high), which leads to too-low interest rates and ongoing low growth. The potential causes include a lack of technological progress, aging, inequality, globalization and monetary policy.

“Not all these arguments seem to be very compelling,” Daalder says. “Take technical progress, for example. Sure, a structural decline in profitable investment opportunities can cause lower investment and higher savings. However, given the continued rise in disruptive technological developments such as blockchain, driverless cars and DNA sequencing, it is hard to see that there is a lack of technological progress.”

“Other causes have certainly played a role, but are likely to decline in the years to come. The US and European banking sectors were seriously damaged following the financial crises, when banks were no longer properly relocating savings towards investment. It is clear that banks have been strengthened in the intervening period, meaning that this factor will decline.”


Aging and inequality

“Another issue is central bank policy. As excess saving (high demand for AAA-bonds) prevails, it is counter-logical to find central banks aggravating the shortage of safe assets through large-scale bond-buying programs (QE). But with the Fed raising rates and the ECB leaning towards tapering, this factor should become less important in the years ahead.”

It is not all good news though, as other factors are more structural, Daalder warns. “Take aging. Older people usually save more while companies faced with a dwindling labor force invest less. However, savers eventually enter the ‘decumulation’ phase of dissaving when they retire. Aging is not going away, even though the excess saving is set to decline once more people move to the decumulation phase.”

“Inequality is another factor. Richer people save a bigger chunk of their income than those with lower pay. The more unequal a society is, the lower the propensity to spend will be. Although we are still waiting for concrete policy measures of the US government, it seems fair to assume that it will not be a policy towards a more equal income distribution.”


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