PIMCO growth outlook hampered by recession risk

The latest Cyclical Outlook from active fixed income investment management firm, PIMCO, for March 2022 has highlighted how economic growth from post-pandemic recovery and sustained savings may be overshadowed by the Russia-Ukraine war and the threat of a global recession.

The report said the escalating situation in Ukraine will likely lead to more inflation outcomes in countries and regions in the next six to 12 months, as central banks prioritise battling against inflation rather than supporting growth with minimal fiscal policy aid.

“The global economy and policymakers are confronted with a stagflationary supply shock that is negative for growth and will tend to push up inflation further,” Joachim Fels, Global Economic Advisor, and Andrew Balls, Chief Investment Officer for Global Fixed Income, wrote in the report.

“There are four main channels of transmission: one, higher energy and food prices; two, disrupted supply chains and trade flows; three, tighter financial conditions; and four, lower business and consumer confidence due to heightened uncertainty.

“In combination, these could easily result in what one participant at our forum called an ‘anti-Goldilocks economy’: an economy that will be both too hot in terms of inflation and too cold in terms of growth.”

Fels and Balls also wrote that the firm anticipates a non-linear outlook for growth and inflation, as the slowly easing impacts of supply chain disruptions spurred on by COVID-19 are exacerbated by the war in Ukraine and the increasing sanctions enforced on Russia.

“While Russia only accounts for 1.5% of global trade, it has a much larger footprint in a range of energy and non-energy commodities,” the report said.

“Ukraine is not only a large producer of grain but also an important supplier of parts for Europe’s auto industry and of inputs into chips production, such as neon. Given the complexity of global supply chains, seemingly minor shortages in certain raw materials and components can have an outsized impact on output and prices.”

The report also confirmed the firm’s view on the threat of a recession later this year or in 2023 as a risk to monitor rather than part of their core outlook.

“For the first time since the stagflationary 1970s and early 1980s, the major Western central banks led by the Fed are unlikely to ride to the rescue in the face of a negative growth shock given that it is accompanied by a positive shock to inflation,” Fels and Balls wrote.

“This increases the risk of weaker growth or even a recession in the developed economies and damage to financial markets.”