US Eco­nomic Ex­pan­sion has Been Slow, But Long

The Economic Times - - Money -

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.

RE­CES­SION UN­LIKELY

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.

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