You are here

Pimco downgrades US growth to 2.5 to 3% on sluggish exports, capex

[NEW YORK] Bond fund company Pacific Investment Management Co cut its forecast for US economic growth in 2015, saying it expected a stronger dollar to hold back exports and that capital expenditures would slow in the energy sector.

Pimco said on Thursday in its quarterly Cyclical Forum outlook report that it expected growth of 2.5 per cent to 3 per cent, down from a prior outlook of 2.75 per cent to 3.25 per cent.

The company also said the Federal Reserve, which on Wednesday opened the door wider for a rate hike later this year, would "proceed at a fairly slow pace." That view was backed by former Federal Reserve Chairman Ben Bernanke, who participated in Pimco's Cyclical Forum earlier this month at its headquarters in Newport Beach, California.

"The scale of the Fed's challenge should not be underestimated," Pimco, a unit of German insurer Allianz SE, said in its report.

"Dr Bernanke, in his contributions to the forum debate, stressed that there is no peacetime precedent of a central bank successfully tightening policy and sustainably exiting the zero bound (interest rate level). The Fed and therefore market participants are entering unchartered waters." It was Bernanke's second time attending Pimco's forum after his first appearance in December.

Pimco, which oversees US$1.68 trillion in assets under management, said the impending Fed rate hike cycle could have large market impacts, including a significant rise in volatility. It cited the 2013 "taper tantrum" after the Fed signaled the beginning of the end of its Quantitative Easing program.

While Pimco sees the United States on track for "solid if not spectacular above-trend growth," largely because robust consumption growth supported by a strengthening labor market, weaker growth elsewhere and the strength of the US dollar are reinforcing expectations of a lower neutral rate for the Fed. A so-called neutral monetary policy is the federal funds rate that neither stimulates nor restrains economic growth.

Pimco said the European Central Bank's 1 trillion euro government bond-buying program, which began last week, as well as a weaker euro and low oil prices were tailwinds for the eurozone.

But, Pimco added: "We can only credibly forecast growth of around 1.5 per cent over the next 12 months. The challenges are familiar: too much debt, too little structural reform and too many political challenges that weigh on confidence and animal spirits." That said, Pimco said there were good opportunities in European bank capital, a sector likely to benefit from support that provided by the ECB's bond-buying program.