Pimco Boosts Outlook for Global Growth as Europe Picks Up Speed

  • ‘Exhausted’ central banks likely to scale back monetary help
  • U.S. fiscal package probably won’t come until early 2018

The world economy is looking stronger than it did three months ago, prompting Pacific Investment Management Co. to boost its forecast for global growth and predict that central banks are moving closer to the end of the era of extremely low interest rates.

Pimco, in its latest cyclical outlook, titled “Scaling It Back,” said the world economy will expand 2.75 percent to 3.25 percent in 2017, up from a forecast of 2.5 percent to 3 percent in December. The euro area, the U.K. and emerging markets will all grow faster than the money manager expected in December, according to the report released Tuesday. 

“With improved growth and inflation prospects, exhausted central banks are likely to move closer to the exit from ultra-accommodative monetary policies,” Pimco wrote. “And it’s not certain whether highly leveraged private and public borrowers around the world will be able to keep dancing when the music stops.”

Pimco also:

* Scaled back its assessment of near-term inflation pressures in the U.S., citing softer wage growth and a recent decline in oil prices. “To be sure, we think longer-term risks to inflation are skewed to the upside,” the firm wrote.

* Predicted a fiscal stimulus package in the U.S. probably won’t be finished until early 2018 because Congress will be busy this year repealing Obamacare, and tax reform will be challenging and time-consuming.

* Said the U.S. Federal Reserve will probably hike its policy interest rate twice more in 2017. The European Central Bank may change its forward guidance around midyear and start trimming its asset purchases further in early 2018.

* Said the chances of a major China “accident” or success by “nationalist, anti-European candidates” in upcoming elections in France and Germany have diminished.

On the investment side, Pimco said it modestly cut its exposure to corporate credit and continues to like non-agency mortgage-backed securities. Higher-yielding emerging market currencies are also attractive, according to the firm. Given the recent run-up in U.S. stock prices, the firm doesn’t “see significant potential for U.S. equities at current valuations,” barring a breakthrough on tax reform.

Pimco, based in Newport Beach, California, manages about $1.5 trillion.

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