Each quarter, Pimco’s investment professionals from around the world gather in Newport Beach to discuss the outlook for the global economy and financial markets. Saumil Parikh, managing director and portfolio manager, recently assumed leadership of these forums. In the interview below, he discusses Pimco’s cyclical economic outlook for the next six to 12 months.
The outlook in a nutshell is:
- Pimco forecasts a one-year cyclical bounce in U.S. economic growth as a result of monetary and fiscal policy measures, but major structural issues remain unaddressed.
- Truly fixing the sovereign debt crisis in Europe would require overcoming a great political divide between “core” and “periphery.” Policy coordination failure, coupled with political failure, is a non-trivial risk in Europe.
- Pimco remains very bullish on emerging markets, but this block of rapidly developing economies is increasingly faced with a policy “trilemma” that forces each country to choose between free capital flows, managed exchange rates and independent monetary policy.
In addition to describing Pimco’s economic outlook, Parikh comments on investment strategies that Pimco is applying to manage risk and deliver returns in a world of multi-speed growth.
Q: Pimco recently raised its cyclical outlook for the U.S. economy. Why the more sanguine near-term view?
Parikh: During our Cyclical Forum earlier this month, we agreed that the U.S. is experiencing a revival of consumer “animal spirits” due partly to the Federal Reserve’s decision to expand quantitative easing, but more importantly due to the White House’s move to the “center” with a renewed expansionary fiscal policy thrust for 2011. Most notably, the inclusion in the White House tax compromise of a one-year payroll tax holiday that trims everyone’s social security taxes by 2%. That’s a very front-loaded tax cut – it will add to household cash flow starting immediately on January 1, 2011. Overall, the combination of tax cuts, unemployment insurance extensions and business investment deductions will likely add 1 percentage point to real GDP growth (not including inflation) over the next year. Thus, we now expect real GDP to expand at a rate of 3% to 3.5%, up from our prior forecast of 2% to 2.5%.
It is important to stress that we see a one-year cyclical bounce in U.S. economic growth as a result of these monetary and fiscal policy measures, but also, that structural issues remain unaddressed, including the persistence and nature of elevated unemployment and extremely high public and private debt levels. This forecast upgrade is a case of kicking the can down the road. We are once again borrowing from the future to enhance growth today. The still unanswered question for 2011 and beyond is how long global investors will continue to tolerate the excessive use of the U.S. public balance sheet for short-term growth benefits before downgrading their risk assessment of either the U.S. dollar or U.S. Treasuries.
In any case, the U.S. economy over the next three to five years will likely struggle to hit 3% real GDP growth, and that is very much in line with our New Normal worldview. We see evidence that the key tenets of the New Normal will continue and that absent a major policy reorientation, industrial countries over a long horizon will face stubbornly high unemployment; private and public sector debt deleveraging; and (for those with the most highly burdened fiscal balance sheets) periodic concerns about sovereign risk.
Click here for the full interview.
