PIMCO sees mild recession due to virus but tight credit poses risk

By Herbert Lash

NEW YORK (Reuters) - Pacific Investment Management Co (PIMCO), one of the world's largest investment firms, told clients on Sunday the coronavirus outbreak is likely to cause a relatively mild and short recession though tight credit markets could worsen the downturn.

The worst for the economy is still to occur in coming months and PIMCO is concerned dwindling corporate cash flows could lead to a sharp tightening of financial conditions, said Joachim Fels, global economic adviser at the Newport Beach, California-based company.

"We are concerned about potential cracks in the U.S. credit cycle," Fels said in his weekly Sunday Signposts note to clients that was an interim update of PIMCO's quarterly macro outlook.

"We believe this is a time to remain cautious on risk assets and focus on liquidity and capital preservation."

PIMCO expects the Federal Reserve to cut interest rates at least another 50 basis points with the possibility the Fed drops rates to zero and resumes asset purchases, Fels said. Futures traders bet the Fed will slash rates to near zero by April.

Other central banks, including in developing countries, are likely to ease policy further in coming weeks and months to sustain the flow of credit to the corporate sector, he said.

The Fed cut rates by half a percentage point last week in an emergency move to shield the U.S. economy from the impact of the outbreak. More than 107,000 people have been infected worldwide and 3,600 have died, according to a Reuters tally.

Japan is very likely already in recession and PIMCO sees a distinct possibility of a technical recession, or two consecutive quarters of negative growth, in the United States and the euro zone during the first half of 2020, Fels said.

PIMCO foresees a slow and mild U-shaped recovery in the later half of this year assuming the outbreak outside of China peaks in a few months as output and demand normalise, he said.

China's recent manufacturing and demand slump will affect activity elsewhere in the world with a time lag of several months, Fels said. Demand for services such as travel, tourism, entertainment and meals outside the home will contract due to containment measures and the fear factor, he said.

PIMCO, which had $1.91 trillion of assets under management as of Dec. 31, has suspended all non-essential business travel due to the outbreak.

(Reporting by Herbert Lash; Editing by Daniel Wallis)