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 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 consider:
- We have 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 horizon.
- 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.
- We see somewhat lower odds of success for nationalist, anti-European candidates and parties in the upcoming elections in France and Germany. Overall, however, we remain cautious on Europe.
- We are scaling back our assessment of near-term inflationary pressures in the U.S. 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 upside.
- 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.”
Joachim Fels is PIMCO’s global economic advisor and a regular contributor to the PIMCO Blog .