PIMCO Downgrades Global Outlook

Pacific Investment Management Company – or simply, “PIMCO” – issued a statement today warning that global growth in 2012 will be constrained by the ongoing Eurozone debt crisis and a slowing Chinese economy. Saumil Parikh, a PIMCO Managing Director, revised downwards the 2012 forecast for the global economy from 2011's 2.5 percent expansion to a considerably weaker 1 – 1.5 percent growth for 2012.

Getting a handle on Eurozone sovereign debt will require several European governments to cut spending in a version of “forced austerity” that in itself, will lead to slower growth. This, combined with debt haircuts and potential defaults will, according to Parikh, lead to a contraction for 2012.

“The euro zone economy cannot bear a concomitant deleveraging in sovereign and banking system balance sheets, given an already weak growth outlook,” Parikh said.

This leaves no other choice but for the European Central Bank to assume the role of “lender of last resort” to Eurozone countries. This is the only way says Parikh to prevent a wide-spread sell-off of assets and a further devaluation of assets as investors scramble to cover their debts.

In addition, Parikh presented an updated assessment for China which could also have a far-reaching impact on the global economy. PIMCO downgraded the outlook for China saying that 7 percent growth for 2012 is more likely than the 8 percent predicted earlier in the year.

As a result of the revised outlook PIMCO now feels U.S. growth could slow to between 0 and 1 percent for 2012. This is a sharp decrease from the previous assessment topping out at 1.75 percent growth.