(June-2004) Global recovery could be short lived

US-based bond market specialist, Pimco, has sounded a warning about the global economic outlook and particularly the longevity of the current recovery.

Pimco managing director Bill Gross says that while Pimco is convinced of the current global recovery, it has reservations as to its stability and longevity.

“How it plays out will depend on interest rates, geopolitical and US consumer proclivities as well as the continuation of the Chinese economic miracle,” he says.

Gross says that, for now, Pimco is mildly bond bearish.

Elsewhere in his analysis, Gross points to the fact that “cheap money” is primarily responsible for today’s economic recovery and accelerating inflation not just in the US, but world-wide.

“When it goes away, however, we may tip the other way, especially if central banks go too far to the upside, pop too many bubbles [housing, stocks, bonds] and precipitate the liquidity trap that [US Federal Reserve Governor] Greenspan has feared for years,” he says.

Gross says this situation has been characterised by senior Pimco staffers as an “unstable equilibrium”.

Using the analogy of a tight-rope walker, he says that all is well until something tips the walker to one side of the wire.

“Higher inflation, geopolitical crisis and financial market volatility can all tip the American consumer or the Chinese growth juggernaut to the opposite side of the wire,” he says.

Gross says that in these circumstances, the situation needs to be monitored closely and that Pimco’s best estimate for this is for an “equilibrium” centred around 2 per cent US real GDP growth and similar amounts in Europe and Japan over the next three to five years.

However, he says what has changed in Pimco’s three-to-five-year forward economic forecast is that the conditions for instability have accelerated with “more US consumer leverage dependent on cheap financing; more Treasuries in foreigners’ hands; more geopolitical instability; and more risk of a slowdown/shock in Asia”.