A World of Synchronized Deceleration

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  • 06 mins 25 secs
PIMCO’s Global Economic Advisor and CIO Global Fixed Income discuss the causes of what we predict will be a “growing, but slowing” global economy over the cyclical horizon.



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Hi, my name's. Tina dart here and i'm a product strategist here it pimco and today i'm joined by my colleagues. You are from fells on andrew balls so with that let's get started, you are let me start with you. Can you explain why we're expecting a growing but slowing cyclical outlook and also the implications of the reduction in central bank balance sheets as well as hire policy rates ? Yeah, what you know, indeed, our story is that we're moving from a world where we had a synchronized acceleration of growth back in two thousand seventeen to a world of a synchronized deceleration next year in twenty nineteen and this year we're basically in a transition period with a fairly wide divergence between the major economies. The reason behind that is that the u s has the fiscal boost, which is really supporting growth. This year has led to an acceleration of growth. Where is europe ? Japan, china already slowing. So looking ahead, we think the u s will converge back down towards the other so we will see still growing but slowing economy two reasons for that. First of all, the fiscal stimulus will start to fade. In the course of next year, and the second reason is that we will see the lacked effects off the past rate hikes that the fed has implemented coming through and also the effect of the slowdown or the runoff in the fed's balance sheet. And indeed, as the right hand chart shows, even if you look more broadly on a global basis, look at the major central banks. The time off balance sheet expansion is coming to amend the ccb will end its bond purchases very likely at the end of this year on the bank of japan has already been reducing the size of its its monthly purchases. So that's why we see the global economy still growing but slowing as we go into next year. Now the next chart shows our regional forecasts. We've already talked about an environment of growing but slowing in terms of growth. But you are kim. If i can ask you to talk a little bit about inflation, what are the risks that inflation overshoots or under shoots, the central bank's targets globally ? Well, i think if we look at the major regions or major economies, i think we both overshooting and undershooting so let's start with europe and japan or the eurozone on japan, where we think that inflation will continue toe undershoot central banks targets over are cyclical horizon the next year or so, eh ? So in europe there are some signs that inflation is picking up. Core inflation is picking up because we've seen somewhat stronger wage growth recently. But it's very, very unlikely that we get back to the target over are cyclical horizon on the same true for japan, the story is very different in the us where we think that core inflation, which is now bang on target two percent for core pc inflation, which is what the fed is focusing on. We think we'll see some overshooting over the next six months or so, only a minor over shooting. But we think that's enough to keep the feds going. So we see the fed hiking rates into this two point seven five two three percent range which most fomc participants view has the neutral rage for right now, switching to geopolitical and political risk. Andrew let's, take a look at the tail risks that pinker has been watching. Now, all of you. Is that the any shift in trade policy is going to be the largest near term swing factor as it comes to markets. For better or for worse. Can you run us through your views on that ? Sure. Thank you, yes, so so you locked him in the economic teams when doing the forecasts have assumed that the present round of us tariffs are enacted with a again a lower proportional response from china and that's baked into the numbers. There's upside risk, says there's a downside. Rex in terms of dan side, you could have further rounds from the us further responses from china. Maybe exchange rate appreciation would be something that the china would respond with that could have a pretty significant negative impact on global economic forecasts. On the upside, it could be that we see a reduction in tariffs president trump made declare victory and say that everything is now okay and reverse the trade war. There's there's the risk of auto tariffs in a in a worse scenario. Nafta in the us, close to agreement with mexico, but still uncertainties with canada so for good or for bad trade is going to be one of the key cyclical. Swing factors in europe one of the secular themes we're emphasizing his populism. You have a populist government in italy, uncertainty over many things, including the the current budget ran you've already seen significant rise in risk breads in italy hasn't spilled over too much, but that's, a very other serpent, difficult, passed in the short term and in the longer term, on yes, we're here in london. We're going through the brexit process, getting to the key part of this, this first two year period source of risk, largely confined to to you, k assets on and again illustrating the theme of politics, populism, ahs. We navigate financial markets in this year, in the next few years.