Secondo PIMCO proseguirà anche nel 2018 lo scenario favorevole di crescita economica superiore al trend di lungo periodo e di inflazione bassa e in leggero aumento. Questo scenario è però già scontato dalle valutazioni dei mercati azionari e l’anno appena iniziato presenta anche dei rischi, legati a tre fattori:La riforma fiscale americana spingerà al rialzo il disavanzo pubblico dei prossimi 10 anni e ridurrà lo spazio di manovra in caso di recessione
- I salari e l’inflazione saliranno progressivamente nel 2018
- Le politiche monetarie diventeranno restrittive
Peak Growth
We expect the global expansion to continue in 2018. Yet investors should prepare for both the consequences of policy shifts and the opportunities presented in more difficult market conditions.
BY JOACHIM FELS, ANDREW BALLS DECEMBER 2017
The good news first: Barring a zombie apocalypse or a sudden spontaneous collapse in asset prices, the current Goldilocks environment of synchronized, above-trend global economic growth and low but gently rising inflation will likely persist in 2018.
In fact, recent growth momentum has been even better than expected across many economies, providing a strong ramp into next year. Moreover, easier financial conditions (reflecting buoyant markets for risk assets and still-low interest rates) imply sustained near-term tailwinds, and fiscal stimulus in the U.S. and elsewhere in the advanced economies is forthcoming. Meanwhile, China keeps suppressing domestic economic and financial volatility while fundamentals in many other emerging market (EM) economies continue to improve. Taken together, PIMCO’s baseline forecast is for world real GDP growth in a 3% to 3.5% channel in 2018, about the same as in 2017 and a quarter point higher than in our September forecast.
However, a Goldilocks-extended scenario is very much baked into the consensus and asset prices. During our December Cyclical Forum we expressed confidence in our baseline economic prognosis, and we zoomed in on the potential shorter- and longer-term consequences of synchronized global growth, fiscal stimulus in the U.S. at a time of already high resource utilization and the reduction of monetary accommodation by major central banks. In a nutshell, we concluded that 2017–2018 could well mark the peak for economic growth in this cycle and that investors should start preparing for several key risks that lie ahead in 2018 and beyond. Here’s why:
Borrowing from the future
First, the prospective U.S. fiscal expansion in 2018 – worth close to 0.5% of GDP in 2018, half of which is likely to come from tax cuts and half from higher federal spending – appears dictated by the political cycle rather than the economic cycle. Fulfilling last year’s presidential election campaign promises and delivering tax cuts and spending increases ahead of next year’s congressional midterm elections makes political sense but could have detrimental longer-term economic consequences. Why?
Arguably, the last thing an economy operating at close to full employment in the ninth year of an economic expansion needs is a shot in the arm from fiscal policy:
- Adding around $1 trillion to the public debt over 10 years (according to the Joint Committee on Taxationestimates) without adding much to potential growth and thus future tax revenues looks manageable while interest rates are low, but would come back to haunt the public coffers if rates rise in the future.
- Most importantly, depleting the fiscal toolkit while the economy is good comes at a price: Higher fiscal deficits and debt levels imply that the room for fiscal stimulus in the next recession will be more limited.
Bend it like A.W.H. Phillips?
A second major risk related to the 2018 outlook is that wage and/or price inflation may finally inflect higher as employment overshoots its natural level.
There are good reasons why this hasn’t happened so far and why the Phillips curve describing the link between (falling) unemployment and (accelerating) wages/prices has thus remained fairly flat:
- Globalization and technology have reduced workers’ bargaining power.
- Low productivity growth has curtailed the scope for real wage gains.
- “Pent-up wage deflation” due to the inability or unwillingness of firms to cut nominal wages in the Great Recession of 2008–2009 had to run its course.
- The recent rise in labor force participation held wage gains down.
However, the risks of a cyclical inflation overshoot in 2018 are rising given the globally synchronized nature of the expansion, additional fiscal stimulus, recent rises in commodity prices and super-easy financial conditions. Global structural forces are still weighing down inflation, but the cyclical pressures are clearly on the up.
The risk of monetary overkill
A third risk for 2018 is that the reduction of monetary accommodation – well-intentioned as it may be given decent cyclical growth – turns out to be too onerous for economies and asset markets that have become addicted to low short rates and depressed term premia across the yield curve. Here’s our monetary policy baseline for 2018:
- Our baseline expectation is for the U.S. Federal Reserve to raise rates three more times in 2018, taking the fed funds rate range to 2%–2.25% by the end of 2018. Meanwhile, the Fed’s balance sheet will shrink on autopilot at a pace that will accelerate quarterly in 2018.
- The European Central Bank (ECB) will likely end its bond purchases by the end of 2018 and signal a first rise in short rates in 2019.
- We expect the Bank of Japan (BOJ) will aim to reduce balance sheet expansion in 2018 and/or tweak its yield curve control policy toward curve steepening, which could contribute to a rise in global term premia.
With markets having become used to and addicted to easy monetary policies, this turn in the tide of global central bank policies poses significant risks to markets and economies, particularly as the new and still-evolving Fed leadership is untested.