The global economy is now more than seven years into a durable but modest expansion. But what will happen when the cyclical tailwind that began last summer fades? And how will key policies in the world’s major economies pivot in response to both rising populist pressures and diminishing returns from unconventional monetary policy and fiscal austerity?
These were among the critical topics discussed and debated at PIMCO’s 36th annual Secular Forum held on May 8–10 in Newport Beach. PIMCO’s secular forum process, refined over decades, enables them to look long-term to manage risks and pinpoint opportunities in a global economy poised to undergo multiple policy pivots. Here are the highlights from the Forum:
Secular pivot points, and baseline outlook
- Monetary policy: We expect Fed balance sheet normalization, but less than many think, with a New Neutral destination for the fed funds rate.
- Fiscal policy: We expect any U.S. fiscal package that passes will be tilted to tax cuts, but light on reform; we see limited fiscal space in Europe.
- Trade policy: We expect the U.S. to focus on bilateral deals (e.g., China, NAFTA) and aggressive use of existing authority within the WTO.
- & 5.) Exchange rate AND geopolitical policies: Amid populist movements in Europe and beyond, we expect the euro to survive and Italy to remain in the eurozone. The Chinese yuan is likely to grind weaker.
On macroeconomic risks...
- In our view, downside and upside risks are roughly balanced for the U.S.; downside risk to growth in both Europe and China is rising over the secular horizon.
- We see a significantly lower tail risk of global deflation.
- We see a risk the fed funds rate lands to the downside of New Neutral levels.
- We are monitoring the global economy’s “driving-without-a-spare-tire” risk in the next recession, whenever it happens.
… and portfolio responses
- Focus on valuation – lots of “good news” is priced in to markets.
- Maintain focus on capital preservation.
- Seek relative value in rates and credit.
- Look to a global opportunity set, including emerging markets.
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