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Pimco Sees 2018 Goldilocks Economy Barring Zombie Apocalypse

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(Bloomberg) -- Pacific Investment Management Co. sees good times continuing in 2018 as global economies grow in sync, but the bond giant warns investors to brace for a downturn.

In a quarterly update to its cyclical outlook released Thursday, Pimco raised its 2018 forecast for global gross domestic product growth by a quarter percentage point to a range of 3 percent to 3.5 percent.

“Barring a zombie apocalypse or a sudden spontaneous collapse in asset prices, the current Goldilocks environment of synchronized, above-trend global economic growth and low but gently rising inflation will likely persist in 2018,” the firm’s Joachim Fels and Andrew Balls wrote. “We concluded that 2017-2018 could well mark the peak for economic growth in this cycle and that investors should start preparing for several key risks that lie ahead in 2018 and beyond.”

Among their reasons for concern, the U.S. Republican tax plan may bring fiscal stimulus at the wrong time -- when the economy is nearing capacity, limiting options in a future downturn. The tax cuts may add no more than 0.3 percent to domestic GDP next year, according to Pimco.

Meanwhile, inflation risks are rising as the U.S. nears full employment and other economies accelerate. Aggressive Federal Reserve interest-rate increases or balance-sheet reduction and less monetary accommodation elsewhere could stifle economies that have grown accustomed to low rates, the authors said.

Investors have baked in much of the good news, making it harder to find deals, according to Fels, a Pimco economist.

“We think markets are already fully priced for this Goldilocks outlook,” he said in a telephone interview.

The firm’s guidance includes:

  • Expect a steepening yield curve as inflation picks up, central banks exert less influence on low rates and investors demand more of a term premium.
  • Consider buying inflation protection and a broad basket of emerging-market currencies for diversification.
  • Mortgage-backed securities may be a safer bet than corporate credit, which should be chosen selectively with an emphasis on short-dated and “default-remote” bonds.

©2017 Bloomberg L.P.

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