The U.S. needs to take action to enhance its long-term competitiveness and reduce its medium-term budget deficit after using a “massive amount” of stimulus to boost economic growth next year, Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said.
“The U.S. is using fiscal and monetary policy to try to attain escape velocity for the economy,” El-Erian said in a telephone interview yesterday from his office in Newport Beach, California. “What we don’t know yet is whether that will be enough not just to change the economy’s trajectory for one year, but to place it on a medium-term sustainable path.”
Pimco, which manages the world’s biggest bond fund, raised its forecast for growth next year in response to the stimulus, he said. It now sees the economy growing 3 percent to 3.5 percent in the fourth quarter of next year from the same period of this year. That compares with its previous estimate for 2 percent to 2.5 percent growth and the 2.2 percent gain forecast for this year by the International Monetary Fund.
U.S. stocks extended gains on news that Pimco had raised its U.S. growth forecast for 2011. The Standard & Poor’s 500 Index rose 0.4 percent to 1,233.00, closing yesterday at its highest level since September 2008.
Pimco began using the term “new normal” almost two years ago to describe the changed state of the world economy after the worst recession since the Great Depression. Under the new normal, the U.S. is seen as being saddled with sluggish growth and high unemployment for years as it struggles to overcome the fallout from the crisis.
U.S. policy makers are reacting to the new normal by pursuing “increasingly unconventional” strategies to aid the economy, El-Erian said. The Federal Reserve intends to purchase $600 billion of longer-term U.S. Treasury securities by the middle of 2011 to help spur growth. President Barack Obama has reached agreement with Republican lawmakers on a budget package that includes a $120 billion payroll-tax cut.
“The new normal is still here,” El-Erian, 52, said. “What the policy makers are doing is kicking the can down the road in response to the symptoms of the new normal, but they’re not yet changing the medium-term dynamics.”
While the U.S. economy is recovering -- it expanded 3.2 percent in the third quarter from a year earlier -- unemployment has remained close to a 26-year high, rising to 9.8 percent in November from 9.6 percent in October.
The key objective of the tax-cut package between Obama and the Republicans -- to generate long-lasting jobs -- will only be possible if it is part of a broader policy program, El-Erian wrote in a Dec. 8 commentary for Bloomberg News.
“We need a more meaningful push to improve America’s long- term competitiveness, which has been compromised by our lagging behind in infrastructure improvements and education, as well as resource misallocations,” he wrote.
Europe, too, is struggling with the fallout from the new normal as the region has been hit with a sovereign-debt crisis. Pimco expects the euro area’s economy to grow by 0.5 percent to 0.75 percent next year, El-Erian said. The Washington-based IMF has forecast growth for the region of 1.9 percent this year.
“Europe is on a completely different track than the U.S.,” El-Erian said. “It is trying to achieve sustainable growth by getting its economic house in order through fiscal austerity.”
The trouble is that some countries there -- Greece, among them -- might not be able to deliver either fiscal consolidation or economic growth, he said.
Europe’s debt crisis has prompted rescues of Greece and Ireland this year, and European leaders are now debating plans for a permanent financial backstop. The European Central Bank has stepped up buying bonds from the region’s most-indebted countries to prevent the market rout from spreading.
The ECB is “basically providing liquidity support for a solvency issue,” El-Erian said. “The question is whether the market will cooperate with that,” he added. “If it doesn’t, you will get disorderly restructurings in some peripheral countries and even more economic contraction.”
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