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Hobble and Muddle

NEWPORT BEACH – Colleagues from around the world recently gathered at PIMCO’s headquarters in California for our annual Secular Forum, when we leave behind high-frequency issues for a few days and, instead, debate what the next 3-5 years hold for the global economy. The perspective is global, informed by the insights of outside speakers, and the focus is on what is likely to happen, as opposed to what should happen.

The last two Secular Forums projected that, after the global financial crisis, the world economy would not reset in its traditional, cyclical manner. Instead, it faced multi-year re-alignments of both a national and global nature. The world economy would heal, but in a slow and uneven fashion, as advanced economies muddled through while the more dynamic emerging world gradually closed today’s income and wealth gaps.

Developments since then have been consistent with this characterization. The G-7 recovery has been unusually sluggish, notwithstanding large and unprecedented policy stimulus (particularly in the US). As a result, unemployment has surged, now exceeding that of emerging economies. Meanwhile, deficit and debt indicators have worsened, both in absolute terms and relative to emerging economies, and the average risk premium on advanced economies’ debt now exceeds that for emerging economies.

These are outcomes that fall well short of policymakers’ expectations, be it in America or in Europe. Indeed, for most of the post-crisis period, all of them have been understandably fixated on stimulating growth.