Pimco predicts a new global economy with weaker growth
PIMCO, the world's largest bond fund, said the economy "looks bad" for most of the world and central banks will hold-off raising interest rates.
Overestimating upside to the green shoots?
Signs of economic recovery in several global regions suggest a slower pace of decline rather than a recovery, Andrew Balls, a PIMCO managing director in London, wrote to clients.
"Rate hikes will be some time in coming," Balls said, adding that the three to five year global economic outlook is for "weaker global growth and especially weaker growth in the developed countries."
A new normal: Lower growth
Balls said the mortgage-backed securities crisis that precipitated the uncontrolled failure of Lehman Brothers was a shock that rippled through financial markets and the real economy, "making a bad situation much worse." Simultaneously, it forced an abrupt turn in the leverage cycle, obviously reducing leverage in the United States and the United Kingdom, but also showing how leveraged other countries like Germany and Japan were.
The response to the problem has been unprecedented government intervention, with emergency measures leading to permanent changes, creating a "new normal" and a new economy. That new economy will be a world of weaker growth, especially in developed countries.
Balls underscored that the government intervention was necessary to stabilize the global financial system, but that intervention has trade-offs: more government regulation to both protect the taxpayer's investment and to prevent repeated mistakes in the financial sector. Accompanying trends PIMCO sees: deglobalization and more friction in the flow of global investments across borders.
Economic Analysis: Balls added that in the euro-zone there may be a need for more fiscal stimulus from member states, since at the supranational level there is no fiscal authority. The European Central Bank also has been more cautious regarding credit easing, and the depth of their monetary stimulus will depend on the deflation threat.
Overall, Ball paints a picture of a developed world with lower growth, less-free movement for capital, more-modest revenue and earnings expectations by businesses, and a more-cautious stance by citizens, particularly regarding consumption (increased savings, decreased consumption).
Each of the above is consistent with a developed world that racked-up too much debt -- from homeowners who used home equity loans for consumption, to firms who engaged in dubious leveraged buy-outs -- with the actions often masking a lack of permanent wage or revenue gains.
The pull-back in unsustainable borrowing would have been enough to slow growth; the financial crisis magnified that drag-effect on commerce and on broader economies.