(September 17, 2012) – Recovery will be a long and slow process for the global economy, as unconventional monetary policy helps stave off another left-tail disaster, predicts PIMCO Managing Director Saumil Parikh.
Parikh leads the investment management firm’s cyclical economic forums, and complied discussions at this month’s event into the report, titled “PIMCO Cyclical Outlook: Building Rickety Bridges to Uncertain Outcomes.”
The likelihood of depression-like left-tail risks for the global economy fell significantly when European Central Bank President Mario Draghi pledged unlimited purchases of short-dated Eurozone sovereign bonds, Perikh concludes from the discussions.
“The ECB policy action has provided the Eurozone and global economies with much-needed breathing room, and just barely at that,” he states. “The probability of a deflationary left-tail outcome emanating from the Eurozone has declined substantially in the short run, yet outright economic growth in the Eurozone will remain elusive in 2013 due to the continuation of games of chicken between policymakers across the Eurozone.”
Speaking of playing chicken, the US’ impending fiscal cliff brought on by debt-ceiling brinksmanship drew much discussion at the forum. If the economics and investing experts in attendance lauded Mario Draghi’s “bold” move to stabilize the Euro-zone economy, they were apprehensive about policies across the pond.
“The politics of U.S. fiscal policy are about to establish an unplanned and somewhat untimely exit from unsustainably large stimulus,” Perikh writes. “The much-publicized ‘fiscal cliff’ is set to hit the U.S. economy on January 1, 2013, and, if left unchecked by new policies, will reduce US aggregate demand by an unimaginable sum of roughly $600 billion to $700 billion (about 4% of GDP).” However, PIMCO forecasts that policymakers will only allow a $200 billion to $250 billion reduction in the stimulus in 2013, resulting in a drag on the economy of roughly 1.5% of GDP, whatever the outcome of this year’s presidential election.
On the bright side, Perikh is optimistic about the US housing and real estate market, asserting the prospect of a “real recovery,” with the “added potential kicker for home price deflation turning to mild inflation over our cyclical horizon.” According to the report, PIMCO expects real residential investment to grow by 10% to 12% in 2013, directly boosting GDP by at least 0.3%. “ It is likely, as well, that real growth in housing will come with substantial positive multipliers such that the total positive impact on the US economy could be 0.5% or 0.6%,” Perikh wrote.