LEADING FIRM URGES CAUTIOUS OPTIMISM FOR 2020 ?
Taking stock of its most recent quarterly Cyclical Forum, PIMCO, one of the world’s largest fixed-income investment management companies, has issued its Cyclical Outlook for the world economy in 2020. In it, the company’s experts foresee modest global recovery this year as many factors that portended recession last year have themselves receded.
PIMCO’s analysts certainly recall the confluence of foreboding market signals and negative sentiment around mid-2019. Fears of a looming recession were indeed on the rise as some historically key economic indicators (e.g., the inverted U.S. yield curve) hinted at weakness and ongoing geopolitical tensions (such as the U.S.-China trade war, Brexit strife, etc.) showed little sign of abating. Fortunately, the overall picture began to brighten through the back half of the year as policy-makers around the globe took steps to stem the tide of slowing growth through lower interest rates and additional government spending, rhetoric between the U.S. and China started to soften, and the deci-sive outcome of the U.K. election signaled greater certainty regarding Brexit. In light of such developments, PIMCO declares, “we are now more confident…that the current window of weakness for global growth will give way to a moderate recovery during 2020.”
Of course, the importance of vigilance is not lost on PIMCO’s econo-mists, who also see, as a tradeoff for the current benefits of last year’s widespread quantitative easing and fiscal support, “less mone-tary policy space available for future action” in the event of a down-turn. For instance, because interest rates in most developed coun-tries—including the U.S., Europe, and Japan—are already near or even below 0% in some cases, the advantages of additional rate cuts by central banks would be quite limited. Former Federal Reserve Chairman Alan Greenspan refers to this conundrum as “pushing on a string.”
Consequently, the burden would probably fall on fiscal policymakers to create impactful economic stimulus as needed, but the ample room that governments have to stimulate their economies via new spending would come at the price of added debt. For most of the last decade, government debt loads in key economies rose to troubling levels, test-ing the tolerance of bond and credit markets and leaving central banks to buy government bonds that private-sector participants would not. Therefore, the proposition of a sharp increase in government spending is rather disconcerting.
Policymakers’ recent positive actions may have simply postponed the day of reckoning in the world economy. Then again, with trade and political turbulence among the bigger variables, it is reasonable to assume that differing governments—especially that of the U.S., which is facing a pivotal election this year—will strive to do what it takes to keep things good for the sake of societal stability. Under that calculus, a continuation of modest growth does appear most likely for 2020.