Building Resilience Amid Global Risks

The members of PIMCO’s Global Advisory Board, a team of world-renowned macroeconomic thinkers and former policymakers, recently joined the discussion at PIMCO’s annual Secular Forum, where they addressed critical factors likely to shape the global economy over the five-year horizon. The board’s insights constitute a valuable input into PIMCO’s investment process, and the views they presented helped inform the latest Secular Outlook, Reaching for Resilience.” The discussion below is distilled from their far-ranging conversation.

Q: What are the longer-term implications of the Russia-Ukraine war?

A: In Ukraine, whatever the outcome of the war, an enormous and costly reconstruction effort will be required. And in Russia, the economy is likely to be severely weakened and less integrated into the global economy, and Russia is likely to be more isolated diplomatically. President Putin will remain a pariah in the eyes of the U.S. and Europe (though not necessarily the rest of the world), and some sanctions will likely remain in place as long as he is in power. Given the reputational risk, few American and European businesses are anticipated to return to Russia. How this ultimately plays out for Putin is being watched closely by China’s President Xi Jinping and will likely influence his calculus regarding Taiwan.

NATO, for its part, should emerge larger, stronger, and more focused on deterring Russia. Defense spending in Europe is likely to increase substantially. Ultimately, Putin does not want to take on NATO: He knows how costly that would be for Russia.

The war has had a major impact on European energy supply and policy. We’re seeing the beginning of Europe’s long-term effort to reduce reliance on Russian oil and gas. In the near term, that means shifting to alternative suppliers. In the medium to longer term, we can expect increased investment in energy resilience, including infrastructure and alternatives such as wind, solar, and nuclear. A key question: Will individual countries look to secure their own energy sources, or will the EU pull together a regionwide strategy with greater synergies and efficiencies?