The housing slowdown in the US poses significant downside risk to economic growth in the US and globally, according to PIMCO managing director, portfolio manager, Paul McCulley.
This was among the key issues raised at PIMCO’s recent cyclical economic forum. During its quarterly cyclical economic forums, PIMCO investment executives from around the world discussed the firm’s outlook for the global economy and financial markets in the coming year.
“How contagious would a slowdown in the US be for non-US growth, and what would be the effect on inflation?” asked McCulley.
Based on the agenda items raised, he said PIMCO’s portfolio strategy would essentially be “a ‘Goldilocks’ outcome — not too hot, and not too cold — for the global economy”.
Speculation about whether the US economy would experience a soft or hard landing was addressed, along with discussion about any flow-on effects this could have on national economies outside the US.
“We continue to expect a soft landing as our base case scenario, but with a stagflationary smell.
“Specifically, we see appreciably slower growth for the US, with very mild contagion on non-US growth, and with inflation a touch higher than previously anticipated,” McCulley said.
Even going as far as referring to the decline in the US housing sector as a “recession”, his prediction is that it will be worse than had been previously forecast.
In tempering his use of the word “recession”, he pointed out that “a housing recession is not the stuff of an economy-wide recession”.
“É the recession in the US housing sector — and yes, it is fair to call that sector in recession — will be nastier than expected, both directly in terms of residential investment and indirectly via the effect on consumption.”
While adding that there was some difference of opinion among PIMCO executives about the extent of its focus on housing, with “a vocal minority [believing] we are focused too much on housing”, he said it was a fact that sales volumes in the housing market were crashing.
Relating the housing figures to consumer spending, McCulley said there is a lot it doesn’t know about the indirect effects the falling housing sector would have.
“We have to be humble about just how much we don’t know about how housing will perform and how it will affect the economy over our cyclical horizon,” he said.
