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Pimco Says Tightening Financial Conditions Will Slow Global Growth

NEWPORT BEACH, CA., OCTOBER 1, 2014: PIMCO offices in Newport Beach where bond king Bill Gross usedNEWPORT BEACH, CA., OCTOBER 1, 2014: PIMCO offices in Newport Beach where bond king Bill Gross used
PIMCO offices in Newport Beach where bond king Bill Gross used to work. Gross is now located in another tower down the street October 1, 2014.Photograph by Mark Boster--LA Times via Getty Images

Bond fund manager Pacific Investment Management Co lowered its forecast for growth of global real gross domestic product in 2016 by a quarter-point to a range of 2% to 2.5%, citing a continued tightening of financial conditions.

Pimco said on Wednesday the general sense at its most recent economic forum was that while the almost seven-year-old “BBB economic expansion” has been underwhelming all along, “this year it would likely feel even more BBB: bumpy, below-par and brittle.”

Actual global GDP growth was 2.8% in 2014 and 2.6% last year, Pimco noted, adding that “our forecast sees the slowdown continuing.”

Pimco’s newly created global advisory board – consisting of former Federal Reserve Chair Ben Bernanke, former British Prime Minister Gordon Brown, Princeton University professor Anne-Marie Slaughter, Singapore state investment fund managing director Ng Kok Song, and former European Central Bank President Jean-Claude Trichet—met with Pimco portfolio managers and executives the day before the forum.

The Federal Reserve is likely to raise interest rates just once or twice this year, Pimco said, given excessive U.S. dollar strength and the negative impact of Chinese yuan depreciation on financial conditions.

That said, the risk of a U.S./global recession on Pimco’s cyclical six-to-12-month horizon remains relatively low, and certainly lower than equity and credit markets had come to price in during the first couple of months of 2016, the asset manager said.

For the eurozone, Pimco said its baseline is for trend-like GDP growth in a below-consensus 1% to 1.5% range and a continued significant undershooting of the European Central Bank’s “below-but-close-to-2%” inflation objective.

“We expect the headwinds for growth from weak global demand and the tightening of financial conditions earlier this year to be roughly offset by the lagged effects of the weaker euro on exports, low oil prices and rising employment supporting consumption, and fiscal policy turning slightly expansionary for the first time since 2009,” said Pimco, which oversaw $1.43 trillion in assets as of Dec. 31,.

Overall, there are three main swing factors for the global economic and financial market outlook this year: China, commodities, and central bank policies, Pimco said.

“Depending on different paths for each of these ‘three C’s,’ it is easy to imagine different shades of darker or brighter economic and market outcomes this year than in our baseline scenario. And given that we cannot know for sure which scenario(s) will come to pass, it makes sense to take a very careful approach in portfolio construction.”