Cyclical Outlook from a Thought Leader
As 2012 draws to a close, we’d like to share some informed views on the economy that come to us from the people at PIMCO. PIMCO spends a great deal of time formulating their top-down views on the macro environment and have developed a very rigorous process to achieve this. The process involves all of the top decision makers at the firm and is refined on a regular basis. Several interesting items have come out from their recently completed December Economic Forum.
They believe that the global economy is in the midst of a cyclical slowdown, driven in part by economics and in part by politics. World economic growth, currently 2% real GDP, will likely slow to 1.3% to 1.8% in 2013. While they see some rebound in the BRIM (Brazil, Russia, India & Mexico) countries (from 2.7% growth to 3.5%-4%), they expect China to slightly decelerate from 7.4% to a range of 6.5% to 7.5%. The UK and Japan are also expected to improve slightly from essentially no growth to .5% growth. Europe’s recession is expected to worsen by 50 to 100 basis points and the US is expected to slow to about 1.5% from 2.2%. Inflation around the globe is expected to moderate slightly, with the exception of China.
They see the rebound from the post 2008 lows as being a result of inventory rebuilding and productivity gains (the latter explaining the stubbornly high unemployment rate here). Recent slowdown in corporate profit growth, the leveling off commodity prices, declining capital expenditures and industrial production and a decline in global trade volumes all point towards their conclusions.
From a policy standpoint, developed economies are trying to find the right mix of fiscal and monetary policy from a structural standpoint rather than looking to “tweak” here or there. In the US this is manifested by our governmental dysfunction related to fiscal cliffs and beyond. As with European economies, we have drifted too far for too long along a path that is “unsustainable” (the word now on everyone’s lips). Export driven developing economies have policy issues of their own related to domestic overinvestment and idle capacity.
Global indebtedness and global regulation are on the rise while globalization itself is taking a step back.
As global cyclical growth slows, we should look to the handoff to more secular drivers of growth. However, those secular drivers remain elusive due to the continuation of “New Normal” headwinds of overindebtedness, imbalances, reregulation and deglobalization. Bucking this trend will be residential investment in the US, greater labor productivity in Europe, consumption growth in developing economies and improvements in global energy production.
In the US, PIMCO expects the fiscal cliff will shave 1.25% to 1.75% from GDP. On the positive side, residential investment will be the dominant driver of demand, growing 20-30% and contributing .50% to .75% to US growth