Economic Outlook

Evolutions in Growth, Trade and Geopolitics

PIMCO’s Global Advisory Board discusses the outlook for major economies and geopolitical developments.

The six members of PIMCO’s Global Advisory Board, a team of world-renowned macroeconomic thinkers and former policymakers, recently joined the discussion at PIMCO’s annual Secular Forum, where they addressed critical factors likely to shape the global economy over the three- to five-year horizon. The board’s insights constitute a valuable input into PIMCO’s investment process. The discussion below is distilled from their far-ranging conversation.

Q: What is the outlook for U.S. growth, business sentiment and monetary policy over the secular horizon?

A: Tailwinds supporting continued U.S. growth, at least over the early part of the secular timeframe, include the synchronized global recovery, accommodative financial conditions, tax reform, the regulatory environment and the fiscal policy impulse. Demographics are a drag on growth, but over time we could see productivity begin to improve.

“If tightening financial conditions do some of the Fed’s work for it, then it doesn’t have to be quite as aggressive on short rates.”

- Ben Bernanke

Recent tax reform, along with a more business-friendly regulatory environment, could boost U.S. business confidence significantly. The move to a territorial tax system helps businesses make capital allocation decisions based on efficiency and strategy, not just tax awareness – and they now feel they’re on a more level playing field relative to their non-U.S. peers. And while we’re not necessarily seeing a significant rollback of regulation, the absence of any prospect for substantial further regulation removes a major source of uncertainty for many businesses. In the longer term, however, the significant increase in the deficit implied by recent policy changes will likely reduce U.S. fiscal “space” and the government’s ability to respond to new challenges.

Inflation is increasing in the U.S., but only moderately. The Federal Reserve believes the Phillips curve is quite flat, meaning that low unemployment won’t necessarily translate into an acceleration in inflation. Moreover, the Fed appears willing to accept a modest overshoot of its inflation target. Accordingly, we expect the Fed will continue to raise rates gradually, though it may overshoot neutral at some point. The Fed has reasonable policy tools to respond to the next economic downturn, which could feasibly arrive over the secular horizon, provided the recession is not too deep. However, given the Fed’s limited room to cut rates and the reduced scope for fiscal expansion, a more severe recession would challenge policymakers.

Q: What are China’s longer-term economic goals now that the leadership has consolidated power? And how could developments in China affect the global economy and trade relations?

A: China’s leadership, united under President Xi Jinping, has a clear sense of direction and the will to pursue its objectives. Xi has a timeline for increasing China’s economic strength and influence over a span of decades, including the goal that by 2049 (the 100th anniversary of the founding of the People’s Republic), China will be a fully developed, rich and powerful country with a GDP per capita similar to Germany’s today. Three additional policy priorities over the next several years are to eliminate poverty, reduce pollution by imposing environmental standards and control risk in the financial system.

“China is looking very far ahead, and planning in terms of decades.”

- Ng Kok Song

Beyond its domestic priorities, China is also a major engine of global growth. We will likely see China’s GDP increase at least 5%–6% annually over the next three years even as the growth outlook elsewhere becomes less certain. China’s long-term growth is not likely to be derailed by trade conflict; unlike in years past, it is now much more dependent on internal consumption than external trade.

We see a greater risk of deterioration in the U.S./China trade environment than markets seem to be pricing. We expect prolonged tensions and the possibility of unintended escalations and flare-ups, and we also acknowledge there are some political incentives on both sides for continued low-level skirmishing and posturing in the trade arena.

As a secular base case, we expect a muddle-through scenario between the U.S. and China that stops short of unraveling the global trading system. It is possible for the parties to make progress on issues related to trade deficits and foreign investment, but any challenges to China’s growth model of state capitalism, which gives the state a leading role in industrial planning and in fostering research and development, will meet firm resistance.

Q: What are the longer-term outlooks for the European and U.K. economies?

A: Europe’s growth has been stronger recently, but its longer-term potential is hindered by structural problems: labor market inefficiencies, a lack of physical investment, and the different economic conditions and levels of competitiveness between core and peripheral countries. Populist politics are creating new barriers to trade, immigration and further European integration. Other political uncertainties include worries about trade wars, possible sanctions on Iran and Russia, and the uncertain resolution of Brexit negotiations. In this environment, we don’t expect progress toward a fiscal union. However, work continues toward banking and capital market unions.

Despite greater populist influence in a number of countries, the euro remains broadly popular. However, diversity in economic conditions and inflation among countries using the euro has complicated the task of the European Central Bank. We expect the ECB to remain dovish, perhaps extending its asset purchases beyond September 2018 and pushing off its first rate hike until the latter part of 2019 at least.

In the U.K., the economy remains sluggish and fragile due to reduced immigration (including by EU citizens), weak productivity growth and some fiscal austerity. Unemployment has fallen to low levels but wage pressures are modest.

The secular outlook for the U.K. hinges largely on the resolution of Brexit. The belief that the U.K. will be better off after leaving still prevails among those who supported the original referendum, even among those likely to suffer the most – the northern areas reliant on industries such as autos and pharmaceuticals, for example. Thus far, there is little clarity or convergence of popular support for a specific Brexit option. It is likely the Brexit timeline – currently formal departure in March 2019 and the end of the transition stage in 2020 – will have to be pushed back again in the case of the customs union and single market to 2021 or possibly even 2022. This would give businesses more time to prepare and may allow a rethink, but it would also extend the period of uncertainty that is weighing on investment and consumer confidence.

“It is likely that Britain will start negotiating for a longer transition period [for leaving the EU]. It is a period of huge uncertainty and will remain so for some time.”

-Gordon Brown

Q: Are we likely to see major geopolitical developments or conflicts in the next few years?

A: As a framework to think about 2018, we can look back a few decades and see how uneventful years are sometimes followed by seismic geopolitical transformations, both negative and positive. For example, consider 1978, a fairly unremarkable year. Yet in 1979, the Soviet Union invaded Afghanistan, we saw the Iranian revolution, and the Cold War intensified. Or consider 1988, another quiet year. Yet in 1989, the Berlin Wall fell, and within a few years we saw the Oslo accords, the Maastricht Treaty, and the demise of apartheid.

In this spirit, does 2018 presage a darker turn in geopolitics similar to 1978, or a more positive outlook similar to 1988?

In the pessimistic view, the secular horizon could see tensions escalate with North Korea, prompting destabilization in Asia more broadly even as more countries look to China for global leadership. In the Middle East, we could see a “hot war” erupt, rather than the “proxy war” we see today. Russia could encroach further on Eastern Europe and escalate its campaign of cyber infiltration. Europe could see authoritarianism and populist pressures mount.

In the optimistic view, we could see genuine and meaningful negotiations toward peace on the Korean Peninsula, more promising developments and possibly even regime change in Iran, and perhaps a truce or stalemate rather than active conflict in Syria. Europe could respond to pressures from Russia and elsewhere by strengthening its integration efforts, such as for common defense and immigration policy.

Over the secular horizon, the geopolitical environment seems somewhat more likely to devolve toward the more pessimistic view, but there is also real potential for historic positive breakthroughs in a number of critical areas. Over the secular horizon, market participants will need to broaden their focus to take into account geopolitical as well as purely economic developments.

For PIMCO’s detailed insights into the longer-term trends shaping the global economy and market environment, please read our latest Secular Outlook, “Rude Awakenings.”


The Author

Global Advisory Board

View Profile

Latest Insights


PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission. | PIMCO Europe Ltd (Company No. 2604517) and PIMCO Europe Ltd - Italy (Company No. 07533910969) are authorised and regulated by the Financial Conduct Authority (12 Endeavour Square, London E20 1JN) in the UK. The Italy branch is additionally regulated by the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act. PIMCO Europe Ltd services are available only to professional clients as defined in the Financial Conduct Authority’s Handbook and are not available to individual investors, who should not rely on this communication. | PIMCO Deutschland GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Deutschland GmbH Italian Branch (Company No. 10005170963), PIMCO Deutschland GmbH Spanish Branch (N.I.F. W2765338E) and PIMCO Deutschland GmbH Swedish Branch (SCRO Reg. No. 516410-9190) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 32 of the German Banking Act (KWG). The Italian Branch, Spanish Branch and Swedish Branch are additionally supervised by the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act, the Comisión Nacional del Mercado de Valores (CNMV) in accordance with obligations stipulated in articles 168 and  203  to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008 and the Swedish Financial Supervisory Authority (Finansinspektionen) in accordance with Chapter 25 Sections 12-14 of the Swedish Securities Markets Act, respectively. The services provided by PIMCO Deutschland GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. | PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-, Brandschenkestrasse 41, 8002 Zurich, Switzerland, Tel: + 41 44 512 49 10. The services provided by PIMCO (Schweiz) GmbH are not available to individual investors, who should not rely on this communication but contact their financial adviser. | PIMCO Asia Pte Ltd (8 Marina View, #30-01, Asia Square Tower 1, Singapore 018960, Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia Limited (Suite 2201, 22nd Floor, Two International Finance Centre, No. 8 Finance Street, Central, Hong Kong) is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862 (PIMCO Australia). This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision, investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. | PIMCO Japan Ltd (Toranomon Towers Office 18F, 4-1-28, Toranomon, Minato-ku, Tokyo, Japan 105-0001) Financial Instruments Business Registration Number is Director of Kanto Local Finance Bureau (Financial Instruments Firm) No. 382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association and The Investment Trusts Association, Japan. Investment management products and services offered by PIMCO Japan Ltd are offered only to persons within its respective jurisdiction, and are not available to persons where provision of such products or services is unauthorized. Valuations of assets will fluctuate based upon prices of securities and values of derivative transactions in the portfolio, market conditions, interest rates and credit risk, among others. Investments in foreign currency denominated assets will be affected by foreign exchange rates. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; the investment could suffer a loss. All profits and losses incur to the investor. The amounts, maximum amounts and calculation methodologies of each type of fee and expense and their total amounts will vary depending on the investment strategy, the status of investment performance, period of management and outstanding balance of assets and thus such fees and expenses cannot be set forth herein. | PIMCO Taiwan Limited is managed and operated independently. The reference number of business license of the company approved by the competent authority is (107) FSC SICE Reg. No.001. 40F., No.68, Sec. 5, Zhongxiao E. Rd., Xinyi Dist., Taipei City 110, Taiwan (R.O.C.), Tel: +886 (02) 8729-5500. | PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. | PIMCO Latin America Av. Brigadeiro Faria Lima 3477, Torre A, 5° andar São Paulo, Brazil 04538-133. | No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world.

This material contains the opinions of the PIMCO Global Advisory Board but not necessarily those of PIMCO and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2018, PIMCO.