Last year was not for the fainthearted: Global growth was “synching lower” and entered a “window of weakness,” the U.S.–China conflict and Brexit uncertainty provided dark mood music, climate concerns took center stage amid extreme weather around the globe, and protests against the political establishment reverberated through Hong Kong, Lebanon, Chile, Ecuador, and many other places.

And yet, spurred by global monetary easing led by the U.S. Federal Reserve’s dovish pivot in early 2019, both equities and bonds had a year of stellar returns.

In this blog we share two of the seven themes published in our outlook for the year, “Seven Macro Themes for 2020,” which distills key points from our recent quarterly Cyclical Forum.

‘Time to recession’ has increased

Recession risks, which had been elevated during the middle part of 2019, have diminished in recent months, helped by additional global monetary easing, a trade truce between the U.S. and China, better prospects for an orderly Brexit, and early signs of a rebound in the global purchasing managers’ indices (PMIs). This assessment is corroborated by an easing of the 12-month-ahead recession probabilities for the U.S. estimated by our various U.S. recession models.

As a consequence, we are now more confident in our baseline forecast that the current window of weakness for global growth will give way to a moderate recovery during 2020. World GDP growth, which has been slowing over the past two years, has yet to bottom. However, PIMCO’s World Financial Conditions Index, which tends to lead output growth, has been easing (rising) in recent months, pointing to a moderate cyclical growth recovery in the course of this year (see Figure 1).

Another factor underpinning a likely pickup in global growth this year is the supportive stance of fiscal policy in major economies such as China, Europe, and Japan. With fiscal and monetary policy now working in the same direction – further easing – in almost all major economies, the outlook for a sustained economic expansion over our cyclical horizon has improved.

But ‘loss given recession’ has likely increased, too

Yet again, the Fed and other major central banks have helped to extend the global expansion by adding stimulus in response to rising recession risks. However, last year’s easing of monetary policy comes at a price: Whenever the next economic downturn or major risk market drawdown hits, policymakers will have even less policy capacity to maneuver, thus limiting their ability to fight future recessionary forces. Thus, while “time to recession” has likely increased with last year’s monetary easing, so has “loss given recession.”

To be sure, this is not a criticism of central banks’ easing actions last year. Hoarding rather than using the policy toolkit is usually not a good idea in the face of rising recession or deflation risks. Rather, these call for aggressive and preemptive action early on to nip them in the bud. This is what both the Fed and the European Central Bank (ECB) attempted last year in response to rising risks and uncertainties, and the first indications are that they were successful in countering these risks. Still, an inevitable consequence of cutting rates further toward the effective lower bound is that there is now less monetary policy space available for future action.

A common response to the above is that while monetary policy has less space, fiscal policy can and should step in and save the day whenever the next recession looms. After all, low interest rates coupled with central banks’ ability and willingness to purchase (more) government bonds create more fiscal space for governments. In theory, we agree and have in fact argued for some time that fiscal policy is likely to become more proactive in the future. In practice, however, it is unlikely that governments and parliaments are able to diagnose recession risks early enough and, even if so, implement fiscal easing in time to prevent a recession, given the slow way in which political processes usually work. Thus, central banks will still have to be the first responders in the next crisis and, again, will be more constrained than they have been in the past.

Another way last year’s monetary easing may increase “loss given recession” is that the combination of a longer expansion and a longer period of even lower rates and “QE infinity” (i.e., central bank asset purchases, or quantitative easing, with no clear end date) incentivizes companies and households to increase leverage, which could come back to haunt them and their creditors in the next downturn.

Read PIMCO’s latest Cyclical Outlook, “Seven Macro Themes for 2020,” for further insights into the 2020 outlook for the global economy along with takeaways for investors, including additional information and discussion on the risks.

Joachim Fels is PIMCO’s global economic advisor and a regular contributor to the PIMCO Blog.