Scaling Back: A Look at Six Key Macro Risks and Economic Drivers

Scaling Back: A Look at Six Key Macro Risks and Economic Drivers
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Scaling Back: A Look at Six Key Macro Risks and Economic Drivers

We see reason for cautious optimism for the remainder of 2017.

Following our investment forum in March, we are now more confident in ourbaseline view that the global economic expansion will be strengthening andbroadening over our cyclical horizon.

Yet there is nuance to this view, as Andrew Balls and I discussed inPIMCO’s recent Cyclical Outlook,Scaling It Back.” While we have more confidence in our baseline view of growth, bothupside and downside risks to the baseline outlook remain elevated, even asrisks have shifted or moderated in some areas. Here are six key factors toconsider:

  • We havescaled back the expected size of fiscal stimulus in the U.S.and now anticipate a fiscal package to be finalized in Congress only inearly 2018. This somewhat reduces the probability of a right-tail(positive) outcome for economic growth, at least over our cyclicalhorizon.
  • It also seems appropriate toscale back the left-tail risk of a full-blown trade warsparked by aggressive U.S. trade policy changes. President Trump’sstatements on tariffs may be more symbolic than real.
  • We are scaling down the risk of a major China “accident” thisyear, given the will and the wherewithal of the Chinese leadership andcentral bank to maintain financial and (relative) exchange ratestability ahead of the 19th National Party Congress. That said, lastyear’s massive credit impulse has now completely evaporated as China’sauthorities have tightened lending standards. This doesn’t bode toowell for a continuation of the impressive acceleration in the globalmanufacturing and trade cycle.
  • We seesomewhat lower odds of success for nationalist, anti-Europeancandidatesand parties in the upcoming elections in France and Germany. Overall,however, we remain cautious on Europe.
  • We arescaling back our assessment of near-term inflationary pressures inthe U.S.One reason is thatlabor force participation has increasedin recent months, which is likely to damp wage inflation for now. Andwhile our baseline view for oil prices is a range-bound sidewaystrajectory, the risks are skewed to the downside given doubts aboutwhether last year’s OPEC deal to restrict supply will be upheld andalso given the return of U.S. shale production. To be sure, we stillthink longer-term overall risks to inflation veer to theupside.   
  • Finally, with improved growth and inflation prospects, exhaustedcentral banks are likely to begin (or continue) scaling back fromultra-accommodative monetary policies.And it’s not certain whether highly leveraged private and public borrowersaround the world will be able to keep dancing when the music stops.

For more on our global economic outlook, including investment themesfor the year ahead, please see ourCyclical Outlook,Scaling It Back.”

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Joachim Felsis PIMCO’s global economic advisor and a regular contributor to thePIMCO Blog.

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