Inflation and Recession Dominate Outlook and Raise Accident Risk – PIMCO

Figures are seen in front of the displayed stock chart and the word ‘inflation’ in this illustration taken June 13, 2022. REUTERS/Dado Ruvic/Illustration

NEW YORK, June 22 (Reuters) – Central banks’ focus on tackling persistently high inflation could lead to a recession in the next two years and increase the risk of “financial crashes”, it said on Wednesday. the American investment company PIMCO.

Rising prices have dominated global financial markets this year, prompting central banks to raise interest rates to contain demand.

But uncertainty surrounding the pace of tighter monetary policies and its implications for global economies has led to high volatility in markets.

Geopolitical instability caused by the war in Ukraine has also contributed to wild swings in bond and stock prices, while exacerbating inflation by driving up the costs of commodities such as oil and gas.

“We see a high risk of recession over the next two years,” PIMCO said in a report Wednesday, referring to the United States and other advanced economies.

The possibility of economic contraction is driven by a variety of risks, including stubbornly high inflation and the potential for further geopolitical unrest.

It also reflects “central banks’ intense focus on fighting inflation in the first place, which increases the risk of financial crashes on top of the sharp tightening in financial conditions already seen,” PIMCO said.

The scramble by central banks to catch up with inflation has been devastating for bond investors this year. Yields on US government bonds – which move inversely to prices – rose sharply in what was the worst start to the year in bond market history.

Due to inflationary concerns, monetary and fiscal responses to a recession, if and when it arrives, could be more subdued and slower than in previous cycles, PIMCO said.

“So while for many reasons we believe the next recession is unlikely to be as deep as the Great Recession of 2008 or the COVID shutdown of 2020, it may well be more prolonged,” he said. he stated, and a slower recovery. .

PIMCO, one of the world’s largest fixed-income investors, said investors should strengthen the resilience of their portfolios in the face of growing uncertainty, with certain products such as US Treasury inflation-protected securities ( TIPS) offering some protection.

He also said he will favor high-quality corporate debt due to potentially higher corporate defaults in a recession marked by weaker monetary and fiscal support.

“Inflation-focused central banks and governments focused on national security and environmental security considerations are likely to be much less inclined to support companies outside of sectors deemed important for the targeted pursuit of resilience,” he said. -he declares.

Reporting by Davide Barbuscia; Editing by Chizu Nomiyama

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