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.
The inability to bounce back from the global financial crisis, long-term unemployment, youth unemployment, the extent to which we haven’t been able to invest in the educational system, lack of labor mobility and social mobility—all that speaks to inequality of opportunity, which is a major concern, not just for this generation but for the next generation. That’s new for the U.S. The U.S. always prided itself on being one of the most equal societies in terms of opportunity.
Will U.S. unemployment continue to come down?
I don’t think the unemployment rate captures well enough what’s happening in the labor force. If we maintain a low unemployment rate and the participation rate remains stuck at a multidecade low, or youth unemployment stays high, or wages don’t grow, that’s a problem. It’s really important to take a more holistic view. If you do that, you come up with Janet Yellen’s conclusion: The improvement in labor conditions hasn’t been as sharp as what the unemployment rate suggests.
Can the U.S. thrive if growth elsewhere is slowing?
The U.S. can continue to improve, but can we lift off, can we attain escape velocity when the rest of the world is challenged? That’s much harder. We control our destiny, but we’re talking about 2.5 percent to 3 percent growth. If we want more, and we certainly need more, then we need the rest of world to go from providing head winds to providing some tail winds. And then the potential is huge.
Edited and compressed for space.