The world is on a deflationary path due to the sharp rise in private savings, which will be difficult to correct in the short-term. To prevent it from leading to deflation, it must be offset by a rise in the global investment rate, according to economists at Natixis.
Key quotes
“The fact there are structural excess savings over investment (ex-ante, before reaching the equilibrium that inevitably rebalances savings and investment at the global level), i.e. a deflationary trend, is revealed by the decline in inflation and the decline in real long-term interest rates. We also note that ex-post, the global savings rate has risen, which is a sign of an even larger increase ex-ante; and that the global private savings rate has risen considerably.”
“If the deflationary trend is not corrected, the world could slide into a real deflation. The mechanism would be as follows: once nominal interest rates can go no lower, real interest rates rise as weak demand continues to push down inflation, leading to depressed demand and production, which is the definition of deflation.”
“Getting off the deflationary path will require an increase in investment, which could result from an increase in efficient public investment (Energy transition, healthcare and medicines, education, digital economy, etc.) in OECD countries and in emerging countries with low investment rates (Africa, Latin America), international financing of additional investment, both public and private.”
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