CEO’s baseline scenario is muted economic growth with muddled policy response
Pimco’s Mohamed El-Erian has identified four potential scenarios for the pattern of economic growth over the next few years, supporting the group’s idea of the “new normal.”
The firm’s chief executive officer says the baseline scenario is muted economic growth combined with a muddled policy response.
“We think there is about 60% possibility of this happening,” he says.
El-Erian attributes a 10% to 15% chance of the three other scenarios emerging. These include governments taking a purely national policy focus, leading to protectionism and even lower global growth as well as an ‘immaculate recovery’ where advanced economies over indebted balance sheets do not hamper recovery and the consumer supports economic growth with renewed spending.
“In the fourth scenario, you get emerging-market economies doing the heavy lifting and they become strong enough to support the global economy,” he adds.
Meanwhile, El-Erian, who is also Pimco’s co-chief investment officer along with Bill Gross, believes the UK has more tools at its disposal to tackle its economic problems than countries like Greece.
El-Erian says although the UK is under pressure, markets are now realising it is in a stronger position than EU nations like Greece, where high deficits have worried investors.
“The UK has a high deficit and has seen a rapid change in its GDP, but it has a certain ability to adjust. The UK has fiscal, monetary and political instruments it can adjust while Greece only has fiscal ones,” he says.
“But the question is: Will the UK be able to combine fiscal adjustment with economic growth?”
El-Erian also outlined the three key considerations he believes should dominate investors’ decisions this year.
“Firstly, labels matter a great deal as they tend to drive behaviour. The most common label this year is post-crisis, but this year is really about the multi-year resetting of markets and policy.
The system will revert, but to a new normal.
“Secondly, balance sheets really matter. The crisis has been about the sequential contagion of balance sheets and when these exploded the public sector had to step in. 2010 is
the year of sovereign balance-sheet risk.”
El-Erian points out prior to 2008, there were no advanced economies running a high deficit of 10% or greater of GDP, yet now 45% of advanced economies are running at this level.
“Finally, all this has accelerated something that was taking place before the crisis – the migration of wealth and growth dynamics from advanced economies to systematically important growth economies,” he says.
