Pimco predicts recession in the US

The head of fixed income at ­global bond giant Pimco, ­Andrew Balls, foresees ‘rude awakenings’ over the next few years.

Andrew Balls, head of fixed income at Pimco

The head of fixed income at ­global bond giant Pimco, ­Andrew Balls, foresees “rude awakenings” over the next few years, including a recession in the US as populist challenges thwart prospects for trade.

Mr Balls said increased “populist risks”, from Italy to Turkey and Argentina, would occur in an environment where central banks, keen to withdraw their stimulus, have less scope to suppress any increase in financial volatility.

“Through most of my life free trade was something of a cornerstone. Clearly that is under threat, and you have political and populist challenges,” Mr Balls told The Australian.

“The US is in the middle of a fight with what used to be its closest allies,” he said, speaking as a confrontational G7 meeting took place in Canada, where US President Donald Trump disavowed the final communique and demanded Canada and the European Union cut tariffs on US goods.

Ahead of his meeting with the North Korean leader in Singapore, Mr Trump strained relations further yesterday, firing off a fresh series of tweets aimed at German contributions to NATO’s defence.

“Germany pays 1 per cent (slowly) of GDP towards NATO, while we pay 4 per cent of a MUCH larger GDP. Does anybody believe that makes sense?!” Mr Trump tweeted.

Mr Balls, who oversees Pimco’s European, Asia-Pacific, and emerging markets and investment teams from London, said 2020, when US fiscal stimulus starts to wear off, was the most likely date for a recession.

“It’s highly likely there will be a US recession with spill-over ­effects to the rest of the world,” Mr Balls said. “This is now a very long cycle by post-war experience,” he said, putting the probability of a recession at 70 per cent based on economic history since World War II.

Mr Balls said central banks wouldn’t be in a position to ­support their economies when ­financial volatility increased. “Financial markets have to stand on their own two feet rather than have a comfort blanket,” he said. “The European Central Bank will probably finish [quantitative easing] this year, the Bank of Japan has surreptitiously reduced its­ ­interventions,” he said. “They all want to get out of QE.” Mr Balls said Italy posed a ­bigger challenge to European ­stability than the UK’s departure from the EU.

“We avoid assets where they rely on central bank support,” he said, adding that Italian 10-year government bonds, paying 3 per cent, were poor value.

“I didn’t vote for Brexit; it was a ridiculous thing to do: a bit like Australia cutting off from commodity markets,” he said, adding that he didn’t expect a major economic jolt from Brexit. “There’s potential for the pound to strengthen,” he said.

“It’s unlikely Italy will leave or default but the probability is not zero, so you have to assess this as a credit risk yet it’s as clear as mud what’s going to happen with the Italian coalition,” he said, referring to the rickety government formed by right and left wing groups.

“In the past 10 years financial markets, finance has done better than the real economy,’ he said, noting Italian GDP per capita hadn’t increased since 2008.