Pimco’s El-Erian Sees Faster Global Growth as U.S. Offsets China

The world economy will enjoy faster growth next year, as improvement in the U.S. and the euro area offsets slowdowns in China and Japan, said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co.

The Newport Beach, California-based asset manager said the world economy is likely to expand 2.5 percent to 3 percent in 2014, up from 2.3 percent this year. U.S. growth will accelerate to 2.25 percent to 2.75 percent from 1.8 percent.

“The U.S. economy is healing,” he said in an interview yesterday. “Household balance sheets are in a better place.”

Pimco, which manages $1.97 trillion in assets, sees Chinese growth slowing to 6.75 percent to 7.25 percent from 7.8 percent over the last 12 months, according to El-Erian. Japan’s economy will expand 1 percent to 1.5 percent, down from 2.4 percent in 2013.

He said it’s virtually certain the Federal Reserve will begin moderating its asset purchases by the end of March, with a 50-50 chance of a move next week. He said the Fed is likely to couple any tapering announcement with a cut in the interest rate it pays on banks’ excess reserves and a strengthened commitment to keep monetary policy easy for an extended period.

The euro-area’s economy will expand by 0.25 percent to 0.75 percent in 2014, after contracting 0.4 percent this year, he said.

Job Market

The Pimco executive said he was heartened by the broad-based improvement in the U.S. job market last month. Payrolls increased by 203,000, while the unemployment rate fell to 7 percent from 7.3 percent in October, the Labor Department reported on Dec. 6. The employment-to-population rate also rose while hourly earnings increased.

“The breadth of improvement was notable,” El-Erian said.

The Fed’s “hyperactive” monetary policy has given the U.S. economy time to mend after its deepest recession since the Great Depression, according to El-Erian.

The Fed is buying $85 billion of bonds per month. It has also promised to keep its target for the federal funds rate near zero at least as long as unemployment remains above 6.5 percent and forecast inflation is not above 2.5 percent.

“You’re looking at a transition where the Fed will remain engaged but will alter its policy mix,” by gradually reducing its bond buying while strengthening its forward guidance on short-term interest rates, he said.

He said he expects the Fed to cut the 0.25 percent rate it pays commercial banks on excess reserves as part of that transition. While such a move wouldn’t have a “dramatic impact,” it would underscore the Fed’s commitment to keeping rates low, he said.

Mushrooming Reserves

Banks’ reserves have mushroomed as the Fed purchased securities from them in its bid to lower long-term interest rates. Banks currently have more than $2 trillion in extra cash at the Fed, according to data from the central bank.

Even as the economy improves next year, it won’t achieve “escape velocity,” according to El-Erian. The big missing ingredient is stepped-up capital spending by companies.

“We have yet to see business investment really pick up,” he said. “Companies still prefer to use their excess cash for financial engineering” such as buying back shares or boosting dividends.

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