PIMCO warns worst yet to come for economy amid coronavirus

March 09, 2020 09:37
An employee wearing a face mask works on a car seat assembly line at a factory in Shanghai. China’s manufacturing and demand slump will affect activity elsewhere in the world, says PIMCO. Photo: Reuters

Pacific Investment Management Co (PIMCO), one of the world’s largest fixed income investment management firms, told clients on Sunday that the coronavirus outbreak is likely to cause a relatively mild and short recession, Reuters reports.

The worst for the economy is still to occur in coming months, and dwindling corporate cash flows could lead to a sharp tightening of financial conditions, Joachim Fels, global economic adviser at the California-based firm, was quoted as saying.

"We are concerned about potential cracks in the US credit cycle,” Fels said in his weekly Sunday Signposts note to clients that was an interim update of PIMCO’s quarterly macro outlook.

“We believe this is a time to remain cautious on risk assets and focus on liquidity and capital preservation.”

PIMCO expects the Federal Reserve to cut interest rates at least another 50 basis points, and there is a possibility that the central bank drops rates to zero and resumes asset purchases, Fels said.

Other central banks, including in developing countries, are likely to ease policy further in coming weeks and months to sustain the flow of credit to the corporate sector, he said.

The Fed cut rates by half a percentage point last week in an emergency move to shield the US economy from the impact of the outbreak. 

Japan is very likely already in recession and PIMCO sees a distinct possibility of a technical recession, or two consecutive quarters of negative growth, in the United States and the euro zone during the first half of 2020, Fels said.

PIMCO anticipates a slow and mild U-shaped recovery in the latter half of this year assuming the outbreak outside of China peaks in a few months as output and demand normalize, he said.

China’s recent manufacturing and demand slump will affect activity elsewhere in the world with a time lag of several months, Fels said.

Demand for services such as travel, tourism, entertainment and meals outside the home will contract due to containment measures and the fear factor, he said.

PIMCO, which had US$1.91 trillion of assets under management as of Dec. 31, has suspended all non-essential business travel due to the outbreak.

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