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Global Economic Outlook Matthew McLenaghan PIMCO

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Page 1: Global Economic Outlook - Philanthropy · 2018. 8. 24. · PIMCO’s evolving anchoring themes The New Normal and its evolution, the New Neutral, have served us well to understand

Global Economic Outlook Matthew McLenaghan PIMCO

Page 2: Global Economic Outlook - Philanthropy · 2018. 8. 24. · PIMCO’s evolving anchoring themes The New Normal and its evolution, the New Neutral, have served us well to understand

PIMCO’s evolving anchoring themes

The New Normal and its evolution, the New Neutral, have served us well to understand and forecast markets in recent years.

PIMCO_Secular_outlook_02

As of 31 May 2016

SOURCE: PIMCO

Refer to Appendix for additional investment strategy, outlook, and risk information

PIMCO 2016:

“Insecure Stability””

PIMCO 2006:

“Stable Disequilibrium”

PIMCO 2009:

“New Normal” PIMCO 2014:

“New Neutral””

Glo

bal Eco

no

mic

Gro

wth

Rate

Inflated growth vulnerable

to sudden adjustment

Multi-year de-levering and slow

growth in developed world, while

emerging outperforms

Growth converging to slowing

trend trajectories

Overhang of global leverage

constraining policy options

‘New Neutral’ policy rates

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Risk of Policy Exhaustion

Fatter Tails

Parallels with Stable Disequilibrium

Page 3: Global Economic Outlook - Philanthropy · 2018. 8. 24. · PIMCO’s evolving anchoring themes The New Normal and its evolution, the New Neutral, have served us well to understand

PIMCO’s Secular Outlook Stable But Not Secure

• Post-crisis global economy in which growth is just fast enough to avoid stall speed

• Three policy props have maintained stability: near-zero interest rate policy, QE, and levering up in some economies

• All three policies face diminishing returns as costs of unconventional policy are rising

• Baseline outlook for a stable disequilibrium to persist, but with elevated left-tail risks

ZIRP: Zero Interest Rate Policy; NIRP: Negative Interest Rate Policy; QE: Quantitative Easing

Policy props facing diminishing returns, leaving a fragile global economy to confront rising risks

Mk_2cs_intl_outlook_02

Page 4: Global Economic Outlook - Philanthropy · 2018. 8. 24. · PIMCO’s evolving anchoring themes The New Normal and its evolution, the New Neutral, have served us well to understand

Macro Outcomes Over the Cyclical Horizon

“Fatter” tails

Lower probability

Baseline

•Status quo endures

•Supportive fiscal policy, a

gradual reduction in central bank

support, and limited

protectionist policies

•Headline inflation accelerates in

DM while ebbing in EM

Left-Tail • Global recovery disrupted by:

‐ Debt overhang in major economies

‐ Monetary policy exhaustion

‐ Transition to de-globalization powered by populism

Right-Tail • Better growth outcomes

resulting from:

‐ De-regulation

‐ Awakening animal spirits

‐ Accelerated transition from monetary to growth-enhancing fiscal policy

“Fatter” tails

Page 5: Global Economic Outlook - Philanthropy · 2018. 8. 24. · PIMCO’s evolving anchoring themes The New Normal and its evolution, the New Neutral, have served us well to understand

Swing factor (1): Fed taking back ultra-accommodative policy

0.0

1.0

2.0

3.0

4.0

5.0

2.0

4.0

6.0

8.0

10.0

12.0

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Atla

nta

Fed

: wag

e g

row

th tra

cker (%

)

Un

em

plo

ym

en

t ra

te (

%)

Unemployment rate (LHS)

Wage growth (RHS)

As of 16 March 2017

SOURCE: PIMCO , Bloomberg, Haver Analytics, S&P, CoreLogic, MacroMarkets LLC

1.20

1.40

1.60

1.80

2.00

2.20

Dec '14 Apr '15 Aug '15 Dec '15 Apr '16 Aug '16 Dec '16

5yr

Forw

ard

Brea

keve

n In

flatio

n Ra

te (

%)

Fed 5yr Forward

Breakeven Inflation Rate

Page 6: Global Economic Outlook - Philanthropy · 2018. 8. 24. · PIMCO’s evolving anchoring themes The New Normal and its evolution, the New Neutral, have served us well to understand

Swing factor (2): New Faces coming to the Fed

Janet L. Yellen Chair Term: Feb 2018

Governor Term: Jan 2024

Stanley Fischer Vice Chair Term: Jun 2018

Governor Term: Jan 2024

Lael Brainard

Governor Term: Jan 2026

Jerome H. Powell

Governor Term: Jan 2028

As of 16 March 2017

SOURCE: Federal Reserve

* Yellen and Fischer are speculated to step down when their respective chair positions end in 2018; Tarullo’s resignation is effective April 2017

Name Surname

Governor Term: Date

Name Surname

Governor Term: Date

V A C A N T

Daniel K. Tarullo

Governor Term: Jan 2022

R E S I G N E D *

T E R M E X P I R E S 2 0 1 8 *

Page 7: Global Economic Outlook - Philanthropy · 2018. 8. 24. · PIMCO’s evolving anchoring themes The New Normal and its evolution, the New Neutral, have served us well to understand

Swing factor (3): The European political calendar and ECB tapering

As of 16 March 2017

SOURCE: PIMCO, Bloomberg, Haver Analytics,

NOV 2016

DEC 2016

JAN 2017

MAR 2017

MAY 2017

JUL 2017

SEP 2017

NOV 2017

8 Nov: U.S.

presidential

election

4 Dec: Italian

Constitutional

referendum

4 Dec: Austria

re-run of presidential

election

Q1 ’17: UK to

invoke Article 50

March:

Netherlands

General election

Apr–May: French

Presidential election

Sep: German

general election

2017: Italian

election wild card

Oct–Nov: China

19th National

Party Congress

Europe’s political calendar contains

plenty of opportunity for populist

events

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Euro

Are

a In

flatio

n (Y

oY %

)

Headline Core

Page 8: Global Economic Outlook - Philanthropy · 2018. 8. 24. · PIMCO’s evolving anchoring themes The New Normal and its evolution, the New Neutral, have served us well to understand

Swing factor (4): Chinese credit impulse continues to wane

As of 31 March 2017; SOURCE: PIMCO., Bloomberg, Haver. * Credit impulse reflects the change in the rate of growth of credit in the economy

-20%

-10%

0%

10%

20%

30%

Jan '05 Jan '07 Jan '09 Jan '11 Jan '13 Jan '15 Jan '17

Ch

ina C

red

it im

puls

e a

s %

of G

DP*

Page 9: Global Economic Outlook - Philanthropy · 2018. 8. 24. · PIMCO’s evolving anchoring themes The New Normal and its evolution, the New Neutral, have served us well to understand

PIMCO’s 2017 cyclical outlook

PIMCO forecast ranges as of March 2017.

Real GDP and inflation projections reflect the midpoints of PIMCO’s forecast ranges for 2017.

Change relative to 2016

forecast

U.S. GDP: 2.25% | CPI: 2.25%

MEXICO GDP: 1.55%

CPI: 5.25%

U.K. GDP: 2.00%

CPI: 2.75%

RUSSIA GDP: 1.25%

CPI: 4.50%

AUSTRALIA BRAZIL GDP: 1.00% | CPI: 4.50%

EUROZONE GDP: 1.75%

HICP: 1.50%

INDIA GDP: 7.50%

CPI: 4.50%

% of world GDP

JAPAN GDP: 1.00%

CPI: 0.50%

CHINA GDP: 6.25% | CPI: 2.50%

Forecasts GDP Inflation

2016 2017 2016 2017

Developed Markets 1.60 2.00 0.80 2.00

Emerging Markets 4.80 5.25 3.50 3.25

World 2.60 3.00 1.70 2.50

Page 10: Global Economic Outlook - Philanthropy · 2018. 8. 24. · PIMCO’s evolving anchoring themes The New Normal and its evolution, the New Neutral, have served us well to understand

In Conclusion;

> Secular Outlook: “Stable but not Secure”

> Cyclical Outlook:

> Global Expansion Strengthening and Broadening

> However, valuations suggest financial risk markets have somehow priced in our outlook. Therefore;

> Be patient > Avoid big macro calls > Keep powder dry

Page 11: Global Economic Outlook - Philanthropy · 2018. 8. 24. · PIMCO’s evolving anchoring themes The New Normal and its evolution, the New Neutral, have served us well to understand

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