- We will likely see a less integrated global economy in the next five years.
- Recent policy shifts likely have long-term implications for China, which appears focused on creating a more self-reliant domestic economy.
- The U.S. has seen a relatively strong economic recovery, but looking ahead, we believe there is uncertainty about growth. In Europe and the U.K., the 2020s may well be a low growth decade.
- Two significant short-term challenges – supply chain shortages and worker shortages – appear to be accelerating long-term strategic shifts at many corporations.
The 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 five-year horizon. The board’s insights constitute a valuable input into PIMCO’s investment process, and the views they presented helped inform the latest Secular Outlook, “Age of Transformation.” The discussion below is distilled from their far-ranging conversation.
Q: What is the outlook for the U.S. economy, as well as fiscal and monetary policy?
A: The U.S. has seen a relatively strong recovery, but looking ahead, we believe there is a lot of uncertainty about growth. As the large fiscal stimulus of 2020 and 2021 will likely not be repeated, we expect fiscal policy will effectively become a drag on growth in 2022. Likewise, U.S. monetary policy is likely to become somewhat tighter, with the U.S. Federal Reserve first tapering and then moving rates up gradually and opportunistically. Near-term, growth will also slow as economic slack is used up, in our view. Still, growth should be sufficient to support continued healthy job creation into 2022.
The high rate of inflation is a risk many investors are monitoring, as is the Federal Reserve, but as monetary and fiscal policy become more contractionary and as constraints on supply and labor diminish, we expect U.S. inflation will likely slow in 2022. There are some upside inflation risks: We could see a much slower recovery in labor supply and participation than expected, or supply chain issues could be more persistent. We also expect to see increases in house prices and rents gradually filter into U.S. inflation data in the next year. The Fed will be watching inflation expectations to be sure that they remain well-anchored near or modestly above its target.
Over a longer time frame, although growth in potential output has slowed, the U.S. economy appears to have become less volatile in general, with the global financial crisis and the pandemic looking like rare events disrupting a broader trend. Possible reasons for lower volatility in the longer term include more proactive monetary and fiscal policies, improved inventory management, and the reduced size of cyclically sensitive sectors like manufacturing. Another critical question for the secular horizon is whether technological breakthroughs, including recent developments in biotech that contributed to the rapid development of COVID-19 vaccines, will increase the economy’s underlying growth rate and lead to new investment opportunities.