US Economic Expansion has Been Slow, But Long
In an interview to ET NOW, PIMCO’s global economic advisor Joachim Fels said the US is flying close to stall speed, but there are no excesses that could lead to a recession any time soon. Edited excerpts: What do you make of this startling recovery for world markets from February lows? Well, the market has recovered quite nicely from the early February lows. I think this is not only driven by the Fed, but it is really on three fronts that we have seen some improvement —the three Cs — China, commodities and central banks. And the three Cs are related. I think what happened was that the market was very scared in January and February about the prospect of further Fed rate hikes. When oil went all the way down to $30 and for some time even below that, the worries were that this was signalling a coming global recession that would see an increase of defaults in the energy sector.
Central banks have realised that pushing rates too negative is not a good thing. The ECB has been focusing on domestic credit easing and helping the banks instead of cutting interest rates aggressively further. The Fed has become much more dovish. So Janet Yellen is now signalling only at most two rate hikes this year. This has helped China to fix the currency relatively well against the dollar and it has also helped oil prices to recover. So we are in much calmer mood now and I think this is likely to continue.
What happens in the upcoming Fed meet? The markets are clearly pricing in very low chance of a rate hike anytime soon. Even for December, the probability of a rate hike priced into the market is close to 50% but below 50%, whereas the dot plot of the Fed still tells us that they think the base case is something like two hikes this year. I think the truth is probably somewhere in between but it really depends on how we will see progress on two fronts. The first one on the domestic front, it is very important to see what inflation will be doing.
The second factor is the global factor, and there I think it very much matters what the dollar does, what global financial markets do because the Fed is not only data dependent, it is also financial conditions dependent because today’s financial conditions tell us something about growth tomorrow and the day after tomorrow. I think the outlook is for near term I would not expect the Fed to move, in April, most likely also not at the June meeting because inflation is moving in the wrong direction.
You talked about how US recession in 2016 is unlikely. The risk of recession is off the table for now, but could it come back to haunt the US economy in the coming few years. Is US growth at a tipping point? This is what we call the new normal, the new neutral world. This is a world where inflation is much lower. It is actually below target and it is a world where interest rates and the neutral interest rates are much lower. So in a way you can say we are flying close to stall speed. Having said that, there is one reason for confidence and it is that typically recessions happen if there is a combination of either excessive consumption, excessive investment overheating and monetary overkill by the central bank.. But today’s world is very different. We have no overconsumption in the US. Second, there is no over-investment. Finally, there is certainly no monetary overkill from the Fed. The Fed is very cautious. So that is why I am quite confident that the recession probability is very low even though we are seeing low growth.
Will we see more growth expansion in the US economy before we hit the next recession? I think this expansion has legs in the US. Yes it is already fairly old and mature. It is almost seven years old now. It started in the middle of 2009 but it has been a very unusual expansion. It has been a slow expansion. There are no excesses that could lead to a recession any time soon so that is why I think this could actually become the longest economic expansion in the US since 1945. So, far the longest one was the one in the 1990s. It lasted 10 years. This one is seven years old and well it could last even longer than 10 years.