We see reason for cautious optimism for the remainder of 2017.
Following our investment forum in March, we are now more confident in our
baseline view that the global economic expansion will be strengthening and
broadening over our cyclical horizon.
Yet there is nuance to this view, as Andrew Balls and I discussed in
PIMCO’s recent Cyclical Outlook, “
Scaling It Back
.” While we have more confidence in our baseline view of growth, both
upside and downside risks to the baseline outlook remain elevated, even as
risks have shifted or moderated in some areas. Here are six key factors to
scaled back the expected size of fiscal stimulus in the U.S.
and now anticipate a fiscal package to be finalized in Congress only in
early 2018. This somewhat reduces the probability of a right-tail
(positive) outcome for economic growth, at least over our cyclical
It also seems appropriate to
scale back the left-tail risk of a full-blown trade war
sparked by aggressive U.S. trade policy changes. President Trump’s
statements on tariffs may be more symbolic than real.
We are scaling down the risk of a major China “accident” this
year, given the will and the wherewithal of the Chinese leadership and
central bank to maintain financial and (relative) exchange rate
stability ahead of the 19th National Party Congress. That said, last
year’s massive credit impulse has now completely evaporated as China’s
authorities have tightened lending standards. This doesn’t bode too
well for a continuation of the impressive acceleration in the global
manufacturing and trade cycle.
somewhat lower odds of success for nationalist, anti-European
and parties in the upcoming elections in France and Germany. Overall,
however, we remain cautious on Europe.
scaling back our assessment of near-term inflationary pressures in
One reason is that
labor force participation has increased
in recent months, which is likely to damp wage inflation for now. And
while our baseline view for oil prices is a range-bound sideways
trajectory, the risks are skewed to the downside given doubts about
whether last year’s OPEC deal to restrict supply will be upheld and
also given the return of U.S. shale production. To be sure, we still
think longer-term overall risks to inflation veer to the
- Finally, with improved growth and inflation prospects, exhausted
central banks are likely to begin (or continue) scaling back from
ultra-accommodative monetary policies.
And it’s not certain whether highly leveraged private and public borrowers
around the world will be able to keep dancing when the music stops.
For more on our global economic outlook, including investment themes
for the year ahead, please see our
Cyclical Outlook, “
Scaling It Back.”
is PIMCO’s global economic advisor and a regular contributor to the