PIMCO: Bearish Outlook for Global Economy

The global economy is being drained rather than grown, with three factors accounting for the situation:

1. A rise in global imbalance, with consumer cyclical slowdowns;
2. the inability of global policymakers to reach consensus and take decisive action; and
3. the need for deleveraging and reregulation.

Going further, the U.S., the consumer of last resort, is expected to experience zero growth in 2012, with the deficit debate and resulting loss of consumer confidence leading to a further pullback in consumption and perhaps a rise in savings. A move in fiscal policy from expansion to contraction is the driver, and short-term interest rates expected to remain at or near zero for perhaps as long as five years.

Europe’s economy is expected to contract by 0.5-1%, with the International Monetary Fund playing more of a stabilizing than forestalling role in the debt crisis, because of an expected rise of the need for recapitalization of banks and sovereigns.

“Unfortunately,” said Parikh, “that means we argue things will get worse before they get better.” Investment choices, made in consideration of these and additional factors, lean toward independent monetary policy, low credit or inflation risk, strong emerging market credits and long-term inflation-protected securities.