Tina Adatia, Fixed Income Strategist: Hi. I'm Tina Adatia, and I’m a product strategist here at PIMCO. I’m joined today by my colleagues Joachim Fels, our global economic advisor, and Andrew Balls, our CIO of global fixed income. And we’re here to discuss our cyclical outlook on the global economy and markets, which we’ve described this time as “window of weakness.” So, what is driving this window of weakness?
Joachim Fels, Global Economic Advisor: Yeah. Well, it is the slowdown in global trade, and the mini-recession in manufacturing. And, importantly, we think this is now spilling over in all of the major economies. It’s now spilling over into the domestic economy. The consumer had been fairly strong around the world, particularly in the U.S., given the fiscal boost. But we’re now seeing signs that the rest of the economy is starting to be affected by the external weakness. For example, in the U.S., we’re seeing business investment starting to roll over, labor market downshifting, so we are seeing slower payroll growth in the U.S. And so, we see overall GDP growth heading lower, into this window of weakness.
We’ve actually entered the window of weakness already, with the manufacturing PMIs being below 50, that’s the mini-recession. They’ve been declining, and so we’re in this environment where the global economy is now entering what we would call stall speed. And at stall speed, it doesn't take much to tip you over, if you hit further bumps on the road.
Tina: Okay. And stall speed you would describe as — what sort of level on GDP?
Joachim: For the U.S., we see GDP growth downshifting from 3% last year, 2% in the second quarter of this year, to something like 1% in the first half of next year. So quarterly annualized rates of 1% in the U.S., which is significantly below trend, in the Euro area, growth has already downshifted, not only to 1%, but actually to a lower rate. And some places like Germany are already in a technical recession.
Tina: I think Joachim, you describe stall speed growth and a 1% absolute level of growth seems to indicate that it doesn't take much to tip over into recession. So, Andrew, how are you thinking about risks to this baseline forecast of stall speed growth?
Andrew Balls, CIO Global Fixed Income: Yes. A lot of the risk relates to politics, policy, politics with trade tensions, one of the big swing factors in terms of the outlook.
Chart: A scatter chart compares global manufacturing PMIs and change in PMI levels since December 2018. Germany is most contractionary and declining, emerging markets is least. Eurozone, UK, U.S., Japan, developed and global markets fall in between.
Some more positive signs in the last few days in terms of the prospect for a U.S.-China kind of mini-deal, but we don’t think this is going to be the end of the story by any stretch of the imagination. It’s going to continue to be a significant risk. Again, with politics, with impeachment threats for the U.S. president, it could be that we see some heightening of the trade tensions. That’s a lever that Donald Trump could pull, given some of the domestic pressures.
Chart: Two bell curves (one higher and one lower) demonstrate how low and slowing growth in the near term compares to heightened uncertainty.
There’s an upside risk as well, though. There is some probability that you could have a comprehensive trade deal, and were it not for the impact that you've seen on macro data, on asset prices from this trade war, the global economy would be doing significantly better. Downside risk as well, there’s the danger, of course, that after China, that the U.S. looks to Europe, in particular Germany, in terms of ongoing trade tensions, as another source of risk.
In terms of central banks, markets are pricing in significant Federal Reserve easing, ongoing Federal reserve easing. It looks pretty reasonable, but it’s different to the dots, as they have them at the moment. So there is the danger of the Fed or other central banks under-delivering, versus market expectations. There is upside risk over time that you could see traction from the moves that the Fed has already made, the European Central Bank has made as well. And then another source of upside risk over time, there’s the potential for fiscal policy to become more expansive, at least for markets to anticipate, greater fiscal policy stimulus, particularly were that to happen in Europe. Not the base case, but a source of upside risk as well.
Tina: Okay. So, stall speed growth with risks around both sides of those. Thank you, Joachim and Andrew. And thank you, again, everyone for listening.
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