Investors today are navigating a global economy in the late stage of the business cycle. Underlying growth appears robust but increasingly vulnerable to downside risk, leading to downward revisions in many growth forecasts. Inflation, already high, has risen further, and markets have priced in rapid monetary tightening as central banks rush to control price spikes.
PIMCO's business cycle indicators - based on data covering a wide range of macro and market factors - now point to a 98% probability that the global economy is in the second half of the economic expansion. However, although we are in a late-cycle environment, our base case outlook does not include a global recession in 2022 (though we acknowledge meaningful downside risks to growth in several regions, including Europe - for details, please read our latest Cyclical Outlook, "Anti-Goldilocks"). Household and corporate balance sheets are generally healthy, pent-up demand for services has yet to be fulfilled, and continued investment in infrastructure and energy is needed. However, the U.S. Federal Reserve and many other central banks have made it clear that taming inflation is now their primary task. Financial conditions are tightening in response, bringing markets out of the reliably easy monetary conditions to which they had become accustomed.
In the real economy, supply shortages persist in areas ranging from labour to semiconductors. Despite hopes for continued improvement in 2022, the war in Ukraine has further upended supply chains and sent commodity prices surging. We expect elevated inflation will continue to prompt central banks to push interest rates higher, creating differentiation across and within asset classes.
For financial assets, late-cycle behaviour historically favours equities and commodities over duration and credit, albeit with more muted returns and higher volatility across the board.
This post is funded by PIMCO
For Professional Investors Only.
PIMCO Europe Ltd (Company No. 2604517) is authorised and regulated by the Financial Conduct Authority (12 Endeavour Square, London E20 1JN) in the UK. PIMCO Europe Ltd services are available only to professional clients as defined in the Financial Conduct Authority's Handbook and are not available to individual investors, who should not rely on this communication. ©2022, PIMCO
Past performance is not a guarantee or a reliable indicator of future results.