Expert Outlook: Mohamed El-Erian
What is your outlook for the global economy in 2015?
The U.S. economy will continue to heal; the European and Japanese economies will continue to struggle. The Fed and the Bank of England will continue to ease their feet off the accelerator, while the Bank of Japan and the European Central Bank maintain the pedal-to-the-metal approach. When you put these things together, they suggest a baseline of muted growth, volatile markets, and major moves in foreign exchange.
Aside from escalating tensions in Ukraine, fragile states, and nonstate actors such as Islamic State, what else could disrupt that forecast?
We could also get a market accident. There’s been a tremendous amount of risk-taking, largely because investors believe central banks will support the markets in a crisis—not because they love markets, but because they’re using them to pursue their economic objectives. As a result, many markets are trading far above levels warranted by fundamentals. That means we tend to get very sharp corrections, as we did in May and June of 2013, and in September and October of this year, that also undermine the functioning of the markets.
What about positive surprises?
We have a ton of cash on the sidelines that so far has been used in a very defensive manner: stock buybacks, higher dividend payments, and defensive M&A. If the environment improves, and there is more risk-taking by companies—which means investing in plants and equipment and people—that could be a turbocharger. A second possible turbocharger is innovation in technology and energy.
Can Europe get back on its feet?
First, you have a mismatch between the need to spend and the wallet. Germany has the wallet, but neither perceives the need nor has the will to spend. Greece has the need to spend, but they don’t have the wallet. Second, you have excessive debt in the system, which discourages new investment. The third issue is the very high level of both short- and long-term unemployment. Studies are clear: The longer you’re out of the labor market, the harder it is to get a job. On youth unemployment, if you are unemployed for a long time, especially if you never had a first job, you risk going from being unemployed to being unemployable.
A deep slump in China could have global repercussions. How likely is that?
China faces risks, but I don’t think they’re as high as the pessimists would have us believe. If you look back, there’s been lots and lots of scares about China, and every time the government has taken it seriously and adapted its policies.
Are wealth and income inequality in the U.S. holding back economic growth?
It’s a trifecta: inequality of income, wealth, and opportunity. We haven’t had that combination for a long time. There’s a growing recognition that inequality has gone from being pro-incentive—you need a bit to encourage entrepreneurship—to being antigrowth. That has to do with the fact that only the top 3 percent have experienced income growth, and the marginal propensity to consume is much lower for the bottom 97 percent.
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