EXECUTIVE SUMMARY

  • Investors should prepare for a synchronized global slowdown next year as tighter financial conditions and increased political and economic uncertainties sap “animal spirits.”
  • While trade policy and the possibility of excessive rate hikes remain key risks to our outlook, late-cycle environments can last a long time if major policy mistakes are avoided.
  • In this environment, we see opportunities in yield curve positions and “bend-but-don’t-break” credit exposures amid overall caution on credit, and we recognize the importance of maintaining flexibility to respond to both positive and negative shocks.

The much-hyped synchronized global expansion of 2017 has long receded in the rearview mirror as global growth reached its zenith around the turn of the year (see “Peak Growth,” Cyclical Outlook, December 2017). But growth has not only plateaued, it has also become more uneven across regions this year. Accordingly, the current market narrative emphasizes increasing economic divergence and differentiation between and within asset classes, both of which are typical of an aging expansion. We agree, as our regular readers will know.

So much for the nowcast, but what lies ahead for macro and markets over our six- to 12-month cyclical horizon? Are we still at the “beginning of the end” of the economic expansion, as we concluded at our March Cyclical Forum, or is the end near? Conversely, are there reasons to be more optimistic on the growth outlook in the face of tax reform and strong profit and GDP growth in the U.S.? And have the sell-off in emerging markets and the widening in credit and European peripheral spreads created buying opportunities?

SYNCHRONIZED DECELERATION

To discuss these and other questions, PIMCO’s investment professionals and several of our trusted senior advisors recently gathered in Newport Beach for the September Cyclical Forum. As some participants noted at the outset, a few of the “rude awakenings” that were incorporated in the longer-term theme coming out of our annual Secular Forum in May have already manifested in the last several months, including the intensification of the China-U.S. trade dispute, the brewing conflict between the EU and the populist Italian government, and of course the recent turmoil in emerging markets – all of which underscore our secular emphasis on caution and liquidity.

We agreed that these recent political and market developments are relevant for the cyclical outlook because they have tightened global financial conditions and increased political and economic uncertainties, which are all likely to damp corporate and consumer “animal spirits” around the world.

"Our cyclical baseline sees this year’s economic divergence giving way to a more synchronized deceleration of growth in 2019."

Against this backdrop and with the fiscal stimulus in the U.S. starting to fade next year, our cyclical baseline sees this year’s economic divergence – with U.S. growth accelerating but the rest of the world slowing – giving way to a more synchronized deceleration of growth in 2019. In our forecasts, the big three – the U.S., the eurozone and China – should all see lower GDP growth in 2019 than this year: Growing, but slowing.