The Beginning of the End?

Recessions are rare animals when financial conditions are favorable and private sector domestic imbalances are hard to find. The synchronized global expansion, which shifted into higher gear last year, will therefore almost certainly enter its 10th year this June and is unlikely to derail over our cyclical six- to 12-month horizon.

However, while continued solid growth in 2018 is a near certainty, the causes of the stronger expansion are more uncertain: Is this just a cyclical sugar rush fueled by easy financial conditions, fiscal expansion in the U.S. and a recovery in many emerging markets? Or are we witnessing the early stages of a supply-side productivity renaissance leading to higher trend growth and helped by lower marginal tax rates, deregulation and animal spirits? In other words, is this the beginning of the end of the global expansion … or of The New Neutral?

Needless to say, the two scenarios have very different implications for the durability of the global expansion beyond 2018 and for inflation and monetary policy, and thus for financial markets as well. While our base case hypothesis remains that solid current economic growth is more demand-led and cyclical than supply-driven, careful portfolio construction will have to acknowledge the considerable uncertainty around this key question.

Goldilocks extended, but seeing signs of peak growth

When PIMCO’s investment professionals from around the globe gathered for the quarterly Cyclical Forum earlier this month, we quickly coalesced around our macroeconomic team’s updated forecast of continued synchronized above-trend growth and moderately rising inflation over the cyclical horizon. While there are some early signs in business surveys that the global trade and manufacturing cycle may have peaked around the turn of the year, and despite a bout of volatility in asset prices in February, still-favorable financial conditions and fiscal support suggest that rumors of a sudden death of Goldilocks are exaggerated.

Compared with our December forecasts, we now foresee marginally higher 2018 GDP growth in the U.S., eurozone, U.K. and China, while we lowered our estimates for Mexico and India. On net, this should leave the world economy in the 3.0% to 3.5% growth channel for 2018 that we envisaged in December, compared with an outcome for 2017 in the middle of the same range.