PIMCO's Cyclical Outlook:Aftershocks of Financial Dislocation

In its latest Cyclical Outlook,composed at an investment forum by its international cadre of financial experts,PIMCO portrayed a world that is still very much feeling,and being influenced by,the shock waves from the global financial crisis.
Notwithstanding the recent calmer tone in the markets,wrote PIMCO's Joachim Fels,Global Economic Advisor,and Andrew Balls,CIO Global Fixed Income,in a PIMCO Insight,the weaker global growth economic momentum at the end of 2015/start of 2016 and the significant,though temporary,tightening in global financial conditions in January/February meant that 2016 economic growth and inflation would likely come in at or below the ranges they had forecast in December for most major economies.*
Consequently,the investment forum lowered PIMCO's forecast for calendar year 2016 global real GDP growth by a quarter-point,to a range of 2-2.5%.Actual global GDP growth was 2.8 in 2014 and 2.6 last year;their forecast sees the slowdown continuing.*
Wherever one looks around the globe,PIMCO believes,nominal and real GDP growth and,therefore,interest rates are likely to stay well below historical norms,very much in line with their New Normal concept of a world economy transformed after the global financial crisis of 2008.The New Normal,Fels and Balls explain,is characterised by both weak potential output and a lack of aggregate demand,reflecting high debt levels and an excess of global desired saving over investment-the global savings glut.This continues to provide significant headwinds for growth,not only on their secular 3-5 year horizon;but also over the cyclical 6-12 month timeframe.It underpins their expectations for a low "neutral" central bank policy-along with The New Normal,they have described The New Neutral,referring more explicitly to central bank policies converging to lower neutral rates than in past economic cycles.*
PIMCO puts the probability of a US/global recession over the next 6-12 months as at most 20%.This is because,right now,none of the typical signs of imminent collapse are flashing:no over-consumption;no over-investment;no over-heating;and no monetary overkill.In short,they expect this expansion to last,lackluster though it be.

The Fed's Rate Hike:What Was Behind It and What It Means

The Federal Reserve announced today that it is hiking the Fed Funds Rate,its iconic interest rate,by 0.25%.*
This action marks the end of an extraordinary seven-year period during which the Fed Funds Rate was held near zero,said Federal Reserve chair Janet Yellen at a post-announcement press conference.It reflects the Open Market Committee's confidence that the economy will continue to strengthen.The Committee judged that a modest increase in the FFR target is now appropriate.The labour market has clearly shown continued improvement.Overall,the Committee sees the risk to both the labour market and economic growth as being balanced.
Low energy prices and the appreciation of the dollar have weighed on inflation.Long-term inflation expectations remain anchored.In considering future policy decisions,we will carefully monitor progress towards our 2% inflation goal.The limit on inflation is due to transitory factors which we expect to slacken over time.An abrupt tightening could increase the risk of pushing the overheated economy into recession.*
It's important not to overblow the significance of this first move-it's only a quarter of a percent.The policy we judge to be accommodative.I continue to judge there is slack in the economy:the depressed level of labour participation and the high level of part-time employment.With rates close to zero,we have less room to respond to negative shocks.If we do not begin to slightly reduce the amount of accommodation,the odds are good the economy would overshoot our goals.
It doesn't mean we need to see inflation reach 2% before we move again.I'm not going to give you a simple formula for when we would move again.It could be on a variety of different forms of evidence,but I don't want to give a simple benchmark.We do expect inflation to be moving up,but we don't expect it to reach 2%.
All oil prices need to do for us to reach our inflation goal is stabilise.I certainly grant that we've seen a number of shocks,but we don't expect them to drop much lower;but to stabilise.Market expectations are for oil to stabilise for awhile and then move up.*
Were there an unexpected,persistent change in financial market conditions,we would need to take them into account.I do not think that expansions die of old age,but the economy does get hit by shocks,and there are significant odds that the economy hits some unforeseen shock that sends it into recession,and of course we would respond.Some European central banks have cut their overnight lending rates;we could study taking the overnight rates into negative territory.This is something we have contemplated-our options.It would be nice to have a buffer in the FFR,to have some ability to respond.We have a far more resilient financial system now than we had before the financial crisis,but we will be evaluating this carefully.*
For average Americans,the Fed's decision reflects our confidence in the US economy.We see an economy that is on the path of sustainable improvement.I hope they will take this to mean that conditions will continue to strengthen and job prospects will be good.Some consumer borrowing rates,some credit card rates (and adjustable rate mortgage and small business loan rates) may move up slightly.
Gradual rate hikes does not mean mechanical,evenly spaced hikes.We will be data-dependent,and as the conditions evolve,we will take them into account.*
We are constantly monitoring foreign economic developments;we understand that our fates are linked.We've made a commitment to the emerging market policy makers that we will communicate as clearly as we can to avoid spillover to the emerging markets.Our economy doing well is encouraging to other economies around the globe.We have taken care to avoid unnecessary negative spillover to the emerging markets,Fed chair Janet Yellen told the reporters.*
In sum,the Fed judges that the US economy is doing so well,they need to slow it down it a bit,so it doesn't overheat into high inflation and another recession.The way they do that is by raising the Fed Funds Rate,which raises the rates on certain consumer loans such as credit card balances and adjustable rate mortgages.

Prominent Economist Pens New Financial Crisis Book

Discussing his new book "The Shifts and the Shocks:What We've Learned-And Still Have To Learn-From The Financial Crisis,"former World Bank senior economist and current Financial Times columnist Martin Wolf said one of the lessons learned is how much can be hidden away in the strange crevices.Today there is more capital in the system than in 2008;there is a very chastened mood;some deleveraging of economies has occurred;the mood is a little bit of recurring optimism.That doesn't mean it can't become more fragile again.
The staggering complexity of the financial system made it difficult to foresee the crisis of '08-such as the shadow banking system,particularly in housing finance.Loans were packaged by intermediaries into very complex securities parceled out into tranches of risk.Huge new pools of investors bought these securities.These were replacements for the old,simple banking system.The whole thing started to be a house of cards.*
The regulators should have seen there was no single,overarching US regulator.The Fed thought there were no huge risks:these were grownups who could understand the risks they were creating,the Fed thought;but the capital structure encouraged people to hide the risks.*
The US economy now is roughly a sixth smaller,so getting inflation above the target is going to be particularly hard.It's very important to avoid deflation,so you have to keep rates low until the economy really recovers.Nobody wants to lend anymore.Banks only want to lend to people who won't spend it.There's no point in that.The fiscal position has tightened dramatically.The demand side of the US economy remains incredibly weak,meaning the world's economy is also.
The monetary policy might tighten a bit,but I think short term rates will not tighten to what we consider normal for a very long time.Ultimately we are headed for another financial crisis;the system isn't reformed enough.Here in the US,it won't be in this decade;I would be concerned about succeeding decades.The risks are there that,as soon as recovery starts,people will start borrowing again,and the structures for that are there,author Martin Wolf observed.

Bahrain's Approach To Business

Bahrain seeks to be an oasis of calm in the Gulf region and the global economy.Iran is its very big neighbor,and Bahrain's view is that for the region to remain stable,Iran must remain engaged with the world.
Because Bahrain's financial sector was diversified,it actually added jobs during the financial crisis.It focuses on insurance,not just banking.
Bahrain is building upon what successes it has:oil,financial services and manufacturing.Tourism,health care and so on fill in the gap.
Bahrain thinks it provides the best value proposition for your business.They live in an environment that is competitive.A steady,stable,prudent approach is better for them than a flash in the pan.
The ratings agencies have reaffirmed their support for what Bahrain is doing.Real estate prices have stabilized there.They are O.K. in Bahrain,according to the Crown Prince,Shaikh Salam bin Hamad al Khalifa.

Euro-zone Crisis Management Update

The Euro-zone is attempting to deal with both the global financial crisis and the regional debt problem,while closely monitoring for signs of inflation.The European Central Bank is holding interest rates steady for the time being.Jean-Claude Trichet,ECB President,said he expects the Euro-zone to grow at a moderate pace.The ECB will adjust liquidity as appropriate.We will continue to see moderate price developments.Inflationary pressures over the medium term will remain contained.
Mr.Trichet urged deficit cuts to consolidate recovery from the financial crisis.
As for the Euro-zone debt crisis,John Taylor,a professor at Stanford University,thinks there's expectation that,down the road,Greek debt will be restructured.It could be quite orderly,changed without a lot of problems.It's quite likely.
In a further unfolding of the debt crisis,Moody's credit rating agency has just downgraded Portugal's sovereign debt.The U.S. market didn't respond to the news,absorbed in the initially positive earnings reports.
Moody's Corporation(MOC)

IMF Takes Helpful Steps

The International Monetary Fund is providing special assistance to poor countries struggling through the financial crisis.Interest payments on outstanding loans will be waived through 2011.As well,up to 17 billion dollars in emergency aid will be granted through 2014.About half of that will be paid out through 2011.IMF gold sales will generate some of the funding.The IMF,based in Washington,D.C.,is an autonomous U.N. agency that is prominently involved in development issues along with The World Bank.

Ministers Agree on Framework

The G8 finance ministers,meeting in Lecce,Italy over the weekend,have produced the Lecce Framework,a strategy for obtaining a set of common principles and standards governing the conduct of international business and finance,according to their communique.Their goal is to identify and resolve regulatory problems that contributed to the financial crisis.U.S. Treasury Secretary Timothy Geithner said the U.S. would propose more conservative standards,including several international proposals to help raise global standards of oversight of cross-border financial firms and global derivatives markets.
The G8 ministers,representing the U.S.,France,Italy,Germany,Russia,Canada,the U.K. and Japan,noted recent improvements in global financial markets and economic data,although significant risks remain.They asked the International Monetary Fund to help devise a plan for winding down fiscal and monetary interventions,while agreeing to maintain the programs as needed.

Colombia Applies For Credit

Colombia has applied to the International Monetary Fund for a 10.4 billion dollar line of credit.Colombian central bank head Jose Dario Uribe said the line is for emergency use only.IMF Managing Director Dominique Strauss-Kahn described Colombia as having strong economic fundamentals.It is the kind of nation the IMF would relax loan conditions for.Indeed,the credit line Colombia applied for has no conditions attached at all.It would only be used in the event the financial crisis deepens.The IMF promotes international monetary cooperation,currency stabilization and international trade.It is an autonomous UN agency based in Washington,D.C.

World Bank Predicts Shrinkage

The World Bank has joined other institutions in forecasting global economic shrinkage in 2009.Emerging markets will see growth drop to 2.1% from the 4.4% prediction of November 2008.A decline in exports,commodity demand and foreign investment is responsible for that.Even should growth resume a better pace,the problems created by shrinkage will continue as far out as 2011,the World Bank thinks.Emerging markets might need as much as 1.3 trillon dollars in aid to cover debt payments and current account deficits.Overall global growth is seen as contracting 1.7%,in the World Bank's view.It would be the first global contraction since World War II.

Ford Backs Cologne Plant

Ford Motor Company is standing behind its Cologne,Germany plant,despite Ford's program of cost cuts and capacity rollbacks to deal with the financial crisis in Europe.Ford will invest 260 million dollars to sustain the plant through the crisis.The plant employs about 800 workers.No job cuts or layoffs are planned in the face of weaker European sales.Minister President Juergen Ruettgers of North-Rhine Westfalia announced the new support.Ford is the only major U.S. automaker not to accept U.S. government aid,having shored up its finances early on.France is suspected of protectionism because of its aid to Renault plants in the south of France.

Qatar To Aid Banks

Qatar is buying the investment portfolios of seven of the nation's banks,in order to bolster confidence in the resource-rich nation.According to the Doha Securities Market,the portfolios will be purchased with the assistance of Qatar Central Bank by the end of March.To date,Qatar has avoided debt and political strife from the financial crisis,unlike some of its Gulf neighbors.Its economy is regarded as sound.Qatar should continue to experience growth through the downturn.In response to the bank news,the Qatar stock market shot up about 9%.

IMF Aids East Europe

The International Monetary Fund has played a major role in rescuing East Europe from the financial crisis.Since Q4 of 2008,the IMF has parceled out 50 billion dollars of its 250 billion reserves to East European and other countries,as they deal with cratering exports,investment and currencies.Social unrest has occurred in Bulgaria,Latvia and Lithuania because of the worsening downturn.Among recent IMF loans were 18.8 billion to Hungary,2.46 billion to Belarus,2.35 billion to Latvia and 16.4 billion to Ukraine.Pakistan has received 7.6 billion,while Iceland has gotten 2.1 billion.British Prime Minister Gordon Brown has called for an increase in IMF reserves,fearing a lenghthier crisis could deprive nations of aid,leaving them in economic winter.IMF officials say 500 billion would be enough for the crisis,but others aren't so sure.

Sheikh Manages Sovereign Wealth

Sheikh Hamad Al-Thani manages Qatar's sovereign wealth fund.We are affected by the financial crisis,the sheikh said,but the banking system is still strong;the economy is still strong,thank God.For us in Qatar,our acquisitions are not bad.No doubt there is a tough road.We have two or three quarters to watch it very carefully,the sheikh cautioned.

Brown Calls For Unity

Gordon Brown,the British Prime Minister,said that the economic downturn can only be ended by international cooperation.Individual countries can do a great deal to help their own economies,but only global efforts can provide a long term solution,through better regulation and coordinated intervention.The International Monetary Fund and World Bank must play a larger role in crisis prevention and resolution.Only a truly international response of policy and governance can be effective,Mr.Brown stated.If we all coordinate our response,there will be a quicker global,and therefore British,recovery,he maintained.Mr.Brown plans to meet with CEOs of the largest international banks in April to discuss dealing with global financial problems.

China Creates Stimulus

China has unveiled a 586 billion dollar economic stimulus package.It consists of price breaks,tax cuts and subsidies.China needs exceptional growth just to keep up with its expanding population.The effects of the financial crisis are spreading from small and medium to large enterprises,closing factories across the country.University graduates are finding it difficult to find jobs,and of the 200 million migrant workers who came home for Chinese New Year celebrations,as many as 10 million of them have no jobs to go back to in the big cities.This aspect of the largest human migration in the world is,frankly,worrying to the authorities,who wonder just what these unsettled workers will do now.Small comfort that China has just surpassed Germany,and is now considered the third largest economy in the world,behind the U.S. and Japan.

Bank of Canada Cuts

The Bank of Canada has lowered its key interest rate by 0.75 to 1.5%,the lowest rate since 1958.The cut was more than projected.The key rate is the target rate for overnight loans between commercial banks.For the first time in the financial crisis,the Bank of Canada declared that Canada is now entering a recession.It will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required.Mark J. Carney is Governor of the Bank of Canada.

World Bank Increases Aid

The World Bank will increase aid to developing nations.Aid may reach 35 billion dollars by the end of June,versus 13.5 billion last year.The bank is prepared to commit up to 100 billion over the next three years,as the financial crisis threatens to cut government revenue,reducing public spending on education and health care.The growth forecast for developing countries is a drop of 0.1 in 2009,versus a gain of 1.4 in 2008.Global trade may fall for the first time since 1982.A 10% drop in developing country growth means another 20 million people will live in poverty.In recent years,high food and fuel prices have driven about 100 million into the ranks of the poor.The World Bank,led by President Robert Zoellick,has received loan inquiries from countries in Asia and Latin America this year,and would not be surprised to loan to nations it hasn't heard from in some time,given the global downturn.

Osborn Decries Debt

George Osborn,the Conservative party's Shadow Chancellor of the Exchequer,its chief financial expert,has bitterly criticized British Prime Minister Gordon Brown's response to the financial crisis.Borrowing is out of control,,Mr.Osborn complained,mounting up massive national debt.Interest rates should be slashed.There's plenty of scope to stimulate demand with lower rates.We were already in pretty bad shape coming into this downturn,reducing our room for maneuver.We're in for a very difficult time and a recession.Government needs to be there to help.Monetary policy is the best tool,Mr.Osborn believes.The Bank of England and the European Central Bank will make interest rate decisions on Thursday.

Business-Jet Orders May Decline

Canadian manufacturer Bombardier may be getting fewer orders for business-jets.The Montreal firm said industry-wide orders,except for very light jets,are expected to slow to around 1,000 in 2009,from 1400 this year.Bombardier makes Learjet,Global Express and Challenger corporate jets.It has an overall aircraft backlog of 26.1 billion dollars to shore up earnings during the financial crisis.The company will reshuffle its order book to permit customers who want jets sooner to pay in full.Others will have more time to arrange financing.Bombardier also manufactures rail cars.