Blog Key Takeaways From PIMCO’s Cyclical Outlook: Window of Weakness In our latest Cyclical Outlook, we discuss a period of vulnerability for the global economy.
Investors in recent months have been busy “Dealing With Disruption” (Secular Outlook, May 2019) – such as the escalating trade war between the U.S. and China, changes in government in the U.K. and Italy, the U.S. president criticizing the Federal Reserve, and the vertiginous plunge in bond yields in August. As we discuss in our latest Cyclical Outlook, the global economy is about to enter a low-growth “window of weakness,” which we expect to persist going into 2020 with heightened uncertainty about whether it is a window to recovery or recession. Recession or recovery? In our baseline forecast, the low-growth period of vulnerability over the next several quarters gives way to a moderate recovery in U.S. and global growth in the course of 2020 in response to generally supportive fiscal policies and further monetary easing in both developed and emerging markets. However, our conviction in this baseline economic narrative is lower than usual, given the environment of elevated political uncertainty and fat left and right tail risks. We see two main catalysts that could produce either better or worse economic outcomes than in our baseline. Swing factors The first major swing factor for the outlook is trade policy. On one hand, a further escalation of the trade war could easily tip an already slowing global economy into recession. On the other hand, a comprehensive trade deal between the U.S. and China that removes a significant portion of the already imposed and prospective tariff increases could produce a synchronized reacceleration of global growth in 2020. Our base case is that while a limited trade deal is possible, the tensions between the U.S. and China are likely to remain on a low boil rather than cooling down permanently. Monetary and fiscal policies are the other main swing factor that could push the economy and markets into left and right tail scenarios. Our base case is that the Fed, following the two rate cuts in July and September, delivers additional easing over the next several quarters, thus dis-inverting the U.S. Treasury yield curve and reducing recession risks. However, there is a risk that the Fed under-delivers relative to market expectations, which could lead to a significant sell-off in risk assets and a tightening of financial conditions. Conversely, the main upside risk to economic growth, apart from a comprehensive trade deal, is that fiscal policy in major economies becomes more expansionary. Investment implications During this window of weakness, we think it prudent to focus on capital preservation, to be relatively light in taking top-down macro risk in portfolios, to be cautious on corporate credit and equities, to wait for more clarity, and to take advantage of opportunities as they present themselves. Read PIMCO’s latest Cyclical Outlook, “Window of Weakness,” 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.
Viewpoints Engaging With Stakeholders to Reduce Methane Emissions From Oil and Gas Production Methane emissions from oil and gas production have an outsized contribution to global warming that can be reduced in cost-effective ways, helping mitigate a significant transition risk.
Viewpoints Commodities’ Summer of Discontent: Limited Supply Flexibility Poses Material Risks Supply-side constraints on commodities pose risk to the global economy and elevate right tail risks to inflation.
Blog Assessing Inflation’s Effects Across Emerging Markets The varied responses of individual countries to global inflationary pressures have contributed to elevated real-rate differentials between developed and emerging markets.
Blog Power of Representation: the ‘Us’es’ To celebrate Pride Month, four PIMCO executives share their perspectives on inclusion and diversity in the workplace and the importance of visible representation.
Blog Secular Outlook Key Takeaways: Reaching for Resilience We believe shorter business cycles, elevated volatility, and diminished policy responses warrant a focus on portfolio resilience over reaching for yield.
Secular Outlook Reaching for Resilience Volatility, inflation, and geopolitical strain have countries and businesses focusing on defense. We argue for building resilience in portfolios in this fragmenting world, and delve into risks and opportunities we foresee over the next five years.
Viewpoints Active Versus Passive in Global Funds Active global bond funds distributed in Europe, Asia and Africa have outperformed their passive peers.
Blog Secular Outlook Key Takeaways: Reaching for Resilience We believe shorter business cycles, elevated volatility, and diminished policy responses warrant a focus on portfolio resilience over reaching for yield.
Secular Outlook Reaching for Resilience Volatility, inflation, and geopolitical strain have countries and businesses focusing on defense. We argue for building resilience in portfolios in this fragmenting world, and delve into risks and opportunities we foresee over the next five years.
Blog Fed Battles Inflation Despite the Costs The Federal Reserve ratchets up the pace of monetary tightening, raising questions about the U.S. growth outlook.