While a near-term mechanical bounce in economic activity in response to the lifting or easing of lockdown measures looks likely, we expect the subsequent climb up to be long and arduous.
The global economy has started to recover from the sharpest but also shortest recession of modern times. With the economy transitioning from hurting to healing as envisaged in our April 2020 Cyclical Outlook, PIMCO’s investment professionals from around the globe gathered by video in early June to update our cyclical outlook and discuss the strategy implications. This post summarizes the economic and policy outlook – stay tuned for a forthcoming midyear update of our asset allocation outlook.
Down the elevator, up the stairs
Rather than looking back at the vertiginous drop in economic activity that ended the record 128-month economic expansion in February, we discussed the likely nature and shape of the nascent recovery. We concluded that our baseline continues to be a bumpy and uneven recovery with pre-crisis level of economic activity unlikely to be reached before 2022 in most Western economies. Put differently (and quoting Federal Reserve Bank of Richmond President Thomas Barkin): The economy rode the elevator down but will have to climb the stairs back up.
While a near-term mechanical bounce in economic activity in response to the lifting or easing of lockdown measures looks likely, we expect the subsequent climb up to be long and arduous for the following reasons:
- Social distancing, be it voluntary or mandated, will be necessary and likely until an effective medical treatment for the virus is widely available. This means many sectors will not be able to ramp up to pre-crisis capacity anytime soon.
- Global and national supply chains will remain impaired for some time because reopening will be uneven across countries, regions, and sectors.
- The reallocation of labor and capital from losing to winning sectors and companies is a process that takes time and may even be hampered by policy that keeps “zombie” firms in business.
- A debt overhang in the corporate and household sector as a consequence of the recession will likely weigh on consumer and investment spending for the foreseeable future.