PIMCO's Global Advisory Board Surveys the World Economy

SUMMARY

  • PIMCO’s investment process is designed to encourage new ideas and differing points of view. One way we do this is by inviting outside experts to share their insights and help us test our thinking.
  • These experts include the members of our Global Advisory Board, a team of world-renowned macroeconomic thinkers and former policymakers.
  • Chaired by former Chairman of the Federal Reserve Dr. Ben Bernanke, the Global Advisory Board meets several times a year at PIMCO’s Newport Beach office and contributes to our economic forums.

In late October, the five members of PIMCO’s Global Advisory Board, a team of world-renowned macroeconomic thinkers and former policymakers, met to discuss critical and evolving factors influencing the global economy and markets. Their insights constitute a valuable input into PIMCO’s investment process. The discussion below is distilled from their far-ranging conversation.

Q: It’s a period of political uncertainty. How will political developments affect trade and globalization?

A: In the U.S., much depends on the new president and Congress. (Although the Global Advisory Board meeting occurred before the election, we analyzed implications of both a Clinton and a Trump victory. In light of the election outcome, here we focus on the Trump agenda, and incorporate select additional commentary from our members following the election.) Although both candidates expressed reservations about trade agreements, Trump went considerably further in vowing to renegotiate or rescind existing agreements, including NAFTA (the North American Free Trade Agreement, implemented in 1994). It is not clear that a president can unilaterally abrogate a congressional-executive agreement; moreover, the integration of the Mexican, U.S. and Canadian economies is far too advanced to be reversed. Still, the Trump administration could adopt protectionist policies in violation of NAFTA and other trade agreements and essentially challenge our trading partners to sue us, moves that risk disrupting supply chains and increasing economic uncertainty. Looking forward, the Trans-Pacific Partnership trade agreement is finished, certainly in its current form, which will strengthen Chinese economic influence in Southeast Asia. The populist backlash against globalization and trade is creating ongoing downside risks for growth, both in the U.S. and globally.

International economic and political relations are likely to be highly intertwined in the new administration. Trump has criticized the trade and exchange rate policies of China, but the Chinese prefer him to Clinton because they see him as a pragmatic dealmaker who will not push them on human rights issues. It is likely that we will see another North Korean provocation early in a Trump administration, which has the risk of escalating into a dangerous crisis if Trump pushes back hard on both North Korea and on China. President-elect Trump appears to be backing off his challenge to U.S. alliances with Japan, South Korea and NATO countries; his calls with Asian leaders have been conciliatory and he has expressed his support for NATO. His willingness to improve relations with Russia and cooperate on fighting ISIS/ISIL may improve the chances of reaching a settlement in Syria, but his emphasis on increasing fossil fuel production could hurt the Russian economy. Many U.S. allies will be wary of Trump; U.S. adversaries will wait and see. His election will have the greatest impact on European politics by strengthening the likelihood that populist parties on both the right and the left can win in France and Italy, possibly posing an existential threat to the continuation of the EU.

The board discussed the economic implications of alternative Brexit scenarios. At this point, a “hard” Brexit, in which the UK makes a clean break with the EU single market, seems the somewhat more likely outcome, since Britain will not accept the EU’s rules on free migration. In any case, the process will take years, with exit negotiations followed by bilateral trade negotiations between the UK and many countries, including non-EU countries whose trading relationships with the UK are currently governed by EU-negotiated treaties. Standards of living in the UK are likely to fall, as the decline in the pound raises the cost of imported goods and services. The weaker currency will boost exports to some degree but probably not enough to compensate for the more limited access to Europe’s markets. Capital investment in the UK is likely to decline following Brexit, particularly in key areas such as manufacturing, pharmaceuticals and financial services.

In summary, we are entering a period of greater uncertainty than we had envisaged, defined by new sets of political risks likely to slow already sluggish trade and hamper efforts at necessary economic reforms.