The possibility that global markets could plunge into a recession in the next five years is “around 70 per cent”, according to Pimco.
In its latest Secular Outlook report, the investment firm said the global economy will be “driving without a spare tyre” for the next five years as the US Federal Reserve continues to increase rates and shrink its balance sheet.
“In addition, we see increasing downside risks to the outlook for Chinese growth and eurozone stability,” Pimco said.
“Expansions may not die of old age, as the old saying goes, but if history is any guide we believe the probability of a recession in the next five years is around 70 per cent.”
The company cautioned that in the current ‘new normal’ environment, central banks will have “limited scope” in their ability to cut rates.
“In the next recession, whenever it occurs, the Federal Reserve and other central banks will have less room to cut rates than in past cycles,” Pimco said.
“Some countries – the US, China, Germany – will likely have some ‘fiscal space’ to deploy in the next downturn, but with sovereign debt levels already very elevated, fiscal policy is unlikely to fully offset the constraints on monetary policy in the next global downturn.”
Additionally, the direction of monetary fiscal, trade, exchange rate and geopolitical policy-making could undergo “significant pivots” in the next five years, Pimco said.
“While the direction of some of these policy pivots may be known, the path that policies actually take, their impact on the global economy and their ultimate destination, are today all highly uncertain,” Pimco said.