May 19 (Bloomberg) -- Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said the “new normal” includes heightened government regulation, slower growth and a shrinking global role for the U.S. economy.

“We are looking at a world in which the fist of government is going to be very strong relative to the invisible hand of markets,” El-Erian said in a Bloomberg Radio interview from Pimco’s headquarters in Newport Beach, California.

A greater role for government in private markets and a smaller banking system will lead to economic growth rates of 2 percent or less in the U.S. over the next five years, El-Erian said. The age of consumers’ “entitlement” to purchase more than they make in income is over, he said.

El-Erian is the author of “When Markets Collide: Investment Strategies for the Age of the Global Economy,” published last year to explain the shifting relationship between international markets and to lay out an investment approach that minimizes risk from systemic shocks.

“The role of finance in the global economy and in the U.S. will be much more muted,” El-Erian said in the Bloomberg Radio interview. “Fewer activities will find financing, and as a result this will contribute to lower growth.”

Banks stopped lending last fall in the face of the worst financial crisis in generations. Central banks slashed interest rates and pumped cash into the financial system to jump-start lending, spurring concern their efforts may stoke inflation. El- Erian said inflation will pick up in about a year.

Draining Liquidity

“The issue that attracted the most attention was inflation,” said El-Erian, referring to Pimco’s annual secular outlook forum earlier this month. “Politically, it’s much easier to pump liquidity than to drain liquidity. One of the concerns we have, under our risk scenario, is that these institutions will find it very difficult politically to drain liquidity.”

Consumer prices will increase by an annual 1.4 percent by the end of the first quarter of 2010, according to 56 economists surveyed by Bloomberg. Prices dropped 0.7 percent in April from a year earlier, the biggest decrease since 1955, the Labor Department said May 15.

El-Erian expects the U.S. to play a smaller role in the global economy. The world’s largest economy will contract at a 1.9 percent pace this quarter, returning to a growth rate of 0.5 percent in the July to September period, according to the median forecast of 63 economists surveyed by Bloomberg.

‘Not Only’ U.S.

“There is a recognition that the future of the globe depends not only on the U.S. but on other countries as well,” El-Erian said. “That’s a big change.”

Pimco, the world’s biggest bond fund manager with about $756 billion in assets, opened a mutual fund in October designed to put to work principles outlined in El-Erian’s book. The Pimco Global Multi-Asset Fund invests in stocks, bonds and derivatives and is intended to diversify on the basis of risk the fund assumes rather than on the asset classes it invests in.

El-Erian, 50, returned to Pimco in January 2008 after leaving two years before to run Harvard University’s endowment. Before El-Erian left Pimco, his Emerging Markets Bond Fund posted a 19 percent annualized return in the five years through October 2005, beating more than 90 percent of competitors, according to data compiled by Bloomberg. He also serves as co- chief investment officer with Pimco founder Bill Gross.

To contact the reporters responsible for this story: Thomas R. Keene in New York at tkeene@bloomberg.net; Dakin Campbell in New York at dcampbell27@bloomberg.net

Last Updated: May 19, 2009 14:11 EDT