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Europe to Contract as Much as 1.5%, El-Erian Says: Tom Keene

A euro sculpture stands outside the European Central Bank headquarters in Frankfurt. Photographer: Ralph Orlowski/Bloomberg
A euro sculpture stands outside the European Central Bank headquarters in Frankfurt. Photographer: Ralph Orlowski/Bloomberg

March 13 (Bloomberg) -- Europe may contract 1 percent to 1.5 percent in the next 12 months with the private sector unable to borrow and austerity policies limiting growth, according to Pacific Investment Management Co.’s Mohamed El-Erian.

“The private sector is still starved for credit,” El-Erian, the chief executive officer of the world’s largest manager of bond funds, said in a “Bloomberg Surveillance” radio interview with Tom Keene. “Given the austerity in place, the economy will contract, which is bad for unemployment, especially youth unemployment.”

Pimco’s recession forecast is deeper than the official European Central Bank estimate, which the central bank revised lower at last week’s policy meeting. The ECB said the economy will contract 0.5 percent this year instead of the 0.3 percent projected three months ago, with ECB President Mario Draghi blaming an overhang from the bigger shrinkage in the final quarter of last year.

Ireland’s first sale of 10-year government bonds today since the nation’s 2010 bailout is a sign of the gradual healing in Europe’s financial sector, El-Erian said. Ireland had made structural reforms such as nationalizing banks that must be embraced by the rest of Europe, he said.

Ireland’s Dublin-based debt agency increased the planned sale of bonds to 5 billion euros ($6.5 billion), in its first 10-year debt issue since the international rescue, according a person familiar with the matter, who declined to be identified because the results aren’t yet public. The agency had planned to sell about 3 billion euros of bonds.

Italian Auction

“Irish society understood something early on,” El-Erian said. “You need collective action to bring the country back on path. In Italy and Spain, you are seeing populations question traditional parties and the political order.”

The 17-nation euro declined against a majority of its most-traded peers as borrowing costs increased at an Italian government-debt auction amid concern a political deadlock will derail plans to fix the nation’s finances. The 3.32 billion euros of the 2015 note were sold at a yield of 2.48 percent, up from the 2.30 percent at the prior auction on Feb. 13.

The dollar rose to a three-month high versus the euro after a report showed U.S. retail sales in February increased the most in five months. The 1.1 percent advance in retail sales exceeded all projections in a Bloomberg survey and followed a revised 0.2 percent gain in January, Commerce Department figures showed today in Washington.

U.S. Growth

The U.S. will grow 1.5 to 2 percent in the next 12 months, with further expansion stymied by congressional “dysfunction” El-Erian said.

The retail sales figures follow reports that the world’s largest economy gained 236,000 jobs in February and housing data improved. The only thing holding back the U.S. economy, El-Erian said, was uncertainty caused by the U.S. Congress.

“If the economy was left to its own devices, we would see the growth rate increase to three percent toward the end of the year,” El-Erian said. “Unfortunately, the economy is not left to its own devices and is undermined by congressional dysfunction.”

Pimco founder Bill Gross, who serves as co-chief investment officer with El-Erian, said in a Bloomberg interview on March 8 that the U.S. is moving toward a 3 percent growth rate in 2013 because of the U.S. housing recovery.

Pimco, based in Newport Beach, California, is a unit of the Munich-based insurer Allianz SE. Pimco managed $2 trillion in assets as of Dec. 31.

To contact the reporter on this story: Taylor Tepper in New York at ttepper2@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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