This year has seen the global economy continue along a path of modest overall trend growth, but the path has been anything but clear, due to the
complexities of oil prices, central bank policies and developments in China. In this interview, Richard Clarida, global strategic advisor, and Joachim
Fels, global economic advisor, discuss essential questions surrounding the world’s major economies.
Q: What were PIMCO’s key global macro views coming out of the September Cyclical Forum?
Global growth in a range of 2.5%–3% is not particularly inspiring, but it is what we expect for at least well into next year, and more broadly it is what
we have come to expect in a New Neutral world of overall lower trend growth rates. Despite the impetus from falling oil prices, low interest rates and
massive monetary accommodation, global aggregate demand continues to fall short of ample global supply, prompting continued sluggish growth.
We should note, however, that lackluster average growth disguises some interesting divergences in the global economy. In the U.S., eurozone, U.K. and
potentially Japan, we expect growth rates above trend, even as China and other major emerging economies slow down. This is indeed a multi-speed world.
Turning to global inflation, we see prospects for a modest pickup, and expect inflation in the range of 2%–2.5% as the pass-through of lower oil prices –
and in the case of the U.S., the stronger dollar – on price indexes fades.
Q: What are the risks to those views, both to the upside and downside?
An upside tail risk is that we’ll see the effects of lower oil prices and expansionary monetary policy take hold in a much more dramatic way than many
observers anticipate. If this were to happen, it could prompt higher global growth, especially in the developed economies.
I’ll add that for the first time in years, fiscal policy in the U.S., eurozone and Japan looks set to become (mildly) growth-friendly – that’s less a tail
risk, more a likelihood at this point, but it probably won’t move the needle significantly on growth or inflation.
The downside risks to the global economy today are really concentrated in emerging markets. After August, investors have been watching developments in
China with particular caution. I should first note that our baseline view for China sees below-consensus growth, along with policy leadership with the will
and the wallet to manage the slowdown. Indeed, policy actions in the past month or so have mollified markets to some degree. But there are a lot of
uncertainties. China’s policymakers have the tools, but they must manage a tricky transition, and as global investors we are left wondering if we have
enough transparency into the details. The tail risk remains of a really hard landing in China, perhaps a very sharp devaluation. It’s not our baseline
view, but an important risk to monitor.
Q: What do we expect from the Federal Reserve in December and over the longer term?
With all eyes focused on the Fed’s signals about the timing of the first rate hike, a more significant message is sometimes overlooked: The Fed has
emphasized, and we agree, that this rate hike cycle is going to be very different from prior cycles. It’s going to be an incredibly gradual pace, a long
cycle that may stretch into 2018 or 2019 and follow a lower trajectory as well. Many Fed leaders have acknowledged that the neutral policy rate is well
below historic levels – The New Neutral, as we call it at PIMCO – though the Fed’s uncertainty about the level of that neutral rate is one reason it will
proceed slowly. There’s a limit on how hawkish this Fed can be. An aggressive hike cycle would almost certainly drive a big upward move in the dollar and a
big downward move in risk assets, and that would rapidly limit the Fed’s flexibility for further hawkish hiking.
In a nutshell, our baseline view is for the Fed to lift off zero in December, then proceed very, very gradually, all the while attuned to the global
implications of their actions.
Q: As monetary policies have been so critical to the global outlook since the financial crisis of 2008, what is the near-term outlook for other major
global central banks?
Several of the world’s major central banks appear poised to unleash an even bigger global money glut. The People’s Bank of China has already delivered on
further easing, with more likely to follow, given the strong deflationary pressures in the “old” economy, and the “new” economy still suffering from the
bursting of the stock market bubble.
In the eurozone, concerns over inflation – or deflation – and low growth have the European Central Bank (ECB) pondering a range of possible adjustments to
its asset purchase program. At the next meeting in December, we may see an increase in the program – perhaps expanding the size of monthly purchases and
possibly also extending it past its current end date in September next year. The ECB remains committed to doing whatever it takes.
In Japan, the central bank passed on an opportunity at its October meeting to ease monetary policy further despite its downwardly revised growth and
inflation forecasts. Yet, given the 2% inflation target remains distant, and yen appreciation, which is more likely now that other major central banks are
easing, is an unwelcome prospect, the pressure is on the Bank of Japan to do more.
Q: Shifting gears, could you discuss your roles at PIMCO, and how you collaborate?
Joachim and I have known each other for 10 years, interacting often at conferences and panels. I have always had high regard for his concise and clear
communication and analysis of complex global macroeconomic forces, and I was thrilled to have him join us at PIMCO. As global macroeconomists who never had
time for academic, purely theoretical assumptions about closed economies, Joachim and I see the world in much the same way. Macroeconomics at PIMCO draws
on the talents and insights of our portfolio managers and regional portfolio committees situated around the world, and with Joachim here, we can build on
that existing strength to make macroeconomic analysis even more timely and relevant to the investment process.
I’m thrilled to be working with Rich, whose academic work I followed and valued long before I first met him, along with the Investment Committee, the
regional portfolio committees and the entire portfolio management group on identifying the big global macro drivers for economies and markets. In my own
work, I’ve always emphasized both the global dimension and the interplay between secular and cyclical forces, which is exactly what PIMCO’s macro framework
and investment process is all about.
Q: Looking ahead, what are likely to be the key areas of discussion at December’s Cyclical Forum?
We’ll want to delve into what a multi-speed world means for economies and investors. What are the implications, for example, of a global economy in which
some countries have inflation above 10% while many others have difficulty getting inflation to 2%? What role will currencies, including the strong U.S.
dollar, play in the global outlook? Or the tremendous leverage in the public sector? One key factor of the multi-speed world is monetary policy divergence:
assessing the real implications of one major economy normalizing policy while many other major economies are continuing – or even accelerating – monetary
easing. All this will shape the outlook for The New Neutral global economy in 2016.