Pacific Investment Management Company LLC believes that 2018 will be a strong economic year, but that a 2019 downturn is on the horizon, partially caused by the GOP tax bill.
“Barring a zombie apocalypse or a sudden spontaneous collapse in asset prices, the current Goldilocks environment of synchronized, above-trend global economic growth and low but gently rising inflation will likely persist in 2018,” the firm’s Joachim Fels and Andrew Balls wrote. “We concluded that 2017-2018 could well mark the peak for economic growth in this cycle and that investors should start preparing for several key risks that lie ahead in 2018 and beyond.”
The risks, the group goes on to mention, include a 2019 downturn and correction in the market, as well issues caused by the GOP tax bill.
While the GOP tax bill has yet to pass Congress and may have difficulty in doing so now that the Republicans lost a much-needed vote following the party’s defeat in the Alabama senate race, the bill still likely has the requisite number of votes to see itself through Congress. Should it pass, the bill will dramatically lower taxes for corporations and wealthier individuals, while more moderate cuts will be handed out to the middle and lower classes.
The issues that Pacific Investment Management pointed out is that in the event of a downturn in 2019, the reduced tax base will limit the options available to the government to help pull the economy back up. The group also believes that the tax cuts will add no more than 0.3% to GDP growth, while the Trump administration has long touted a three-percent growth rate as its target. With Bloomberg estimates putting the annual GDP growth rate around 2.3% and 21.% for 2018 and 2019 respectively, the 0.3% boost won’t be enough to hit that three percent mark.
And that three percent is important for more than just political reasons. With the GOP tax bill expected to add $1.4 trillion to the deficit over the next decade, the economic growth is key in offsetting the massive drain in tax revenue that will help pay down that influx of debt.
The takeaway from the paper is that 2018 is likely to see an economic uptick in some sectors, but a 2019 downturn may hit soon after, and the U.S. may not have the tools to effectively respond to the economic damage.
“Donald Trump Says U.S. Never Hit 3% GDP Growth Under Obama — But It’s Misleading,” Fortune, August 30, 2017.
“Pimco Sees a Good Economy in 2018 ‘Barring Zombie Apocalypse,’” Bloomberg, December 14, 2017.