Global Economic Outlook Matthew McLenaghan PIMCO

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

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

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

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

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 *

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

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*

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

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

Disclaimer

The material in this presentation has been prepared by PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862 (PIMCO Australia) and is intended to provide general information only. This presentation is for wholesale clients (within

the meaning of the Corporations Act 2001(Cth) (the Act)) only and must not be distributed to, or passed on to, any retail client (within the meaning of the Act). This presentation is not a recommendation to hold, purchase or sell a

particular financial product and may not include all the information an investor needs to make an investment decision. The information contained herein does not take into account the investment objectives, financial situation or needs of

any particular investor. Before making an investment decision investors should consider whether the information contained herein is appropriate in light of their particular investment needs, objectives and financial circumstances and any

relevant offer document. Investors should obtain relevant and specific professional advice before making any investment decision.

Investment management products and services offered by PIMCO Australia are offered only to persons within its respective jurisdiction, and are not available to persons where provision of such products or services is unauthorised.

This publication may not include all the information an investor needs to make an investment decision. Before making an investment decision, investors should consider whether the information herein is appropriate in light of their

particular investment needs, objectives and financial circumstances and the Fund’s Product Disclosure Statement (PDS). Investors should obtain relevant and specific professional advice before making any investment decision. A current

PDS can be obtained from pimco.com.au

Neither PIMCO Australia nor any of its related bodies corporate make any representations or warranties, express or implied, as to the accuracy or completeness of any of the information contained in this presentation. To the maximum

extent permitted by law, neither PIMCO Australia nor its directors, employees, agents, representatives or advisers accepts any liability whatsoever for any loss arising from the use of information in this presentation.

Past performance is not a reliable indicator of future results. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Except to the extent implied by law, no representation or warranty as

to the validity, certainty or completeness of any of the assumptions or the accuracy of the information, opinions, estimates or forecasts contained in this presentation is made by PIMCO Australia. This presentation contains the opinion of

PIMCO Australia as at the date of the presentation and such opinions are subject to change without notice.

The content of this presentation remains the property of PIMCO Australia. No part of this presentation may be reproduced in any form, or referred to in any other publication, or conveyed to a third party without express written permission

of PIMCO Australia. PIMCO is a trademark or registered trademark of Allianz Asset Management of America L.P. in the United States and throughout the world.

© PIMCO, 2017.