PIMCO's Paul McCulley: "Stagflationary Soft-Landing" for US
PIMCO's Paul McCulley summarizes his group's cyclical outlook for the US economy:
As a group, we marked down our growth forecast and marked up our inflation forecast, which is precisely what you would anticipate that we would do in the face of an oil price shock, because that’s what an oil price shock does. For an oil-importing country such as the United States, it’s a negative for growth and also a negative for inflation.
I guess you could say that we projected a "stagflationary soft landing," if that’s not a contradiction in terms—and I don’t think it is. The outlook is stagflationary, but the outlook is for a soft landing of a stagflationary character as opposed to a stagflationary recession, which is what happened after the oil price shocks in 1973 and 1979.
for the Japanese economy:
We think Japan is in a genuine recovery. That recovery is grounded in the boom that’s going on in China, but it’s real nonetheless. And we don’t anticipate a hard landing but a soft landing for China, so Japan’s recovery has legs. We’re also anticipating that residual deflationary pressures in Japan will fade, leading to a small but positive inflation rate in Japan.
and for Europe:
I guess we’d characterize it as a stagflationary slow grind, with the most important implication being that the European Central Bank is on hold. Given that the stagnation in Europe is going to be exacerbated by the energy price issue, the ECB has no reason whatsoever to tighten policy. The most likely case is that the ECB does nothing, but there is a higher probability of easing rather than tightening, primarily because the core inflation rate is finally grinding down in Europe.