There is a Risk of Another Recession
Between the uncertainty of the presidential election in the United States and the looming second wave of pandemic, Pimco's economic advisor is quite pessimistic, including for the coming years.
Donald Trump is in turn affected by Covid-19, what is the impact for the US presidential election?
In the polls, this has hardly changed anything. It must be said that the undecided rate is very low, more than in the last elections. The Americans have made their choice and are sticking to it. For the campaign, this focuses the debate on the pandemic and the Trump administration’s failure to contain it. This explains the very slight inclination towards Joe Biden in recent days.
What if he’s too sick to run for president?
He would then be replaced by Vice President Mike Pence . The latter is a little better placed in the polls than Donald Trump, because some Republicans disapprove of the current president and consider that his second is a more acceptable choice. But in both cases, Joe Biden is the favorite.
With postal voting, the electoral risk is high, what are the different scenarios?
If the two candidates come neck to neck, legal procedures will be implemented to identify the winner of the election. We must therefore expect demonstrations and some volatility on the markets until January 20, 2021, the day of the inauguration. If procedures fail to determine the next president, which is unlikely, then it will be up to Congress to elect the president. Please note, for the House of Representatives, there will be one vote per state. However, the majority of states are republicans. As for the vice-president, he is elected by the Senate. We could then end up with Donald Trump, President, and Kamala Harris, Vice President, although this is unlikely.
What is the likelihood of another fiscal stimulus before the end of the year?
She is very weak. Republicans are currently focused on the Supreme Court nomination. However, it is possible, with a probability of less than 50%, that a raise will be decided before January 20.
What are the main directions that the economy will take in the event of Joe Biden’s victory?
It depends on the outcome of the legislative elections [which take place on the same day as the presidential election, November 3]. In the event of a Democratic majority in Congress, Joe Biden will have all the leverage to launch major ecological infrastructure programs, lower taxes on the incomes of the middle and poor classes, increase them on the better-off and increase regulation. On the other hand, if Congress emerges in two colors, all stimulus measures will be blocked, and we can expect a new plunge (double dip) in the US economy. Equity markets will be penalized.
What if Donald Trump wins?
The markets should appreciate initially. The US president remains in favor of tax cuts and deregulation. But, in a second step, the tone risks to rise with China , which it accuses of being at the source of the pandemic. And this aggressiveness will not please the markets.
What are your economic forecasts for the next few months?
The recovery is expected to continue at a slower pace than this summer. A double dip – probably less severe than the first because we now know which populations to protect, and how to protect employees – cannot be ruled out, given the second wave of the pandemic and the containment measures that have been put in place at local and regional levels. Even if these measures are less drastic than last spring, people will be reluctant to consume or travel. Of course, countries will be affected differently, depending on the severity of the health condition and the measures put in place, as in the first wave. Asia, and China in particular, appears to be much more effective in its ability to contain the virus.
Do you think the dollar continues to weaken, is its supremacy being questioned?
If the recovery continues, the greenback should continue to decline. But in the event of a double dip, he will recover immediately, as in the early days of the pandemic. This proves that, despite everything, his role of safe heaven, or safe investment, remains intact and that he has ultimately lost none of his leadership. No currency is very attractive today, but the dollar is arguably the least bad.
Public debts soar once again, what can be the consequences?
States continue to get into debt, but at an extremely low rate, lower than when the debts were much less. Debt servicing is therefore no problem, central banks continue to buy government bonds and global demand for risk-free assets remains strong; there is therefore nothing to fear in the short term. Finally, the private sector – households and businesses – tends to save more than to invest, which also makes it possible to finance States. Public debts can be a problem when rates rise, but that’s not going to happen anytime soon. In contrast, private sector debt is much more problematic and could lead to corporate defaults.
Are you worried that certain sectors such as the airline industry will never fully recover from the crisis?
No, once there is a vaccine, and it becomes widely available, then the traffic will gradually resume, probably within two years.
The crisis has further deepened inequalities, which have already been accentuated since 2008, what are the consequences?
The problem is above all the rise of populism, which can have disruptive effects on growth, whether it is to bring far-right, very protectionist, ruling and far-left governments with taxes on the better-off.
What are Pimco’s main orientations for equities today?
We must accept the sad reality of being in a world of low return on investment and prepare for more volatility, given the coming disruptions in economics and politics. We consider equities to be very highly valued. For equities, we fear that the rise in the share of profits in GDP for more than thirty years will end or even turn around. The outlook for corporate profits is not very encouraging; in many countries we are seeing higher taxes on capital, and governments will strengthen labor at the expense of capital.
What about bonds?
Bond yields are very low but could be even lower, so it makes sense to have exposure to government bonds. You have to think about global opportunities, both in emerging markets and in the bond market. Today, buying indices is not a good idea, especially at the level of corporate bonds, where defaults are to be expected.
What structural imprints will the crisis leave?
On the one hand, the rise of inequalities will lead to political and economic disruptions, with the advent of extremist parties. Growing protectionism will lead to deglobalization. Digitization will lead to a less capital intensive economy, with lower investment spending. This will lead to a savings glut that will keep interest rates very low.