PIMCO's CEO and co-chief investment officer Mohamed El-Erian discusses the U.S. economy, prospects for global growth, and short- to medium-term Fed policy.
Given the recent market turmoil, we recently spoke with PIMCO's Mohamed El-Erian to obtain his thoughts and insights on the current market and economic conditions. He offered his reflections on whether we're potentially entering a recession, growth opportunities in a global environment, and Federal Reserve policy. He also commented on how other segments of the global fixed-income markets provide more attractive risk-adjusted return possibilities at this stage than Treasuries.
1. Is the United States slowing down? Are we entering a recession?
Yes, the U.S. economy is slowing in a material way relative to expectations of a quick bounce from the muted growth rates of the first half of the year.
Unfortunately, gross domestic product growth is facing an unusual combination of headwinds that accentuates the impact of long-standing structural impediments. As a result, every major component of GDP growth is likely to weaken, be it domestic or external.
With growth already tepid and many balance sheets stretched, this increases the risk of recession. Whether we end up in a recession, however, is a function of policy reaction. In other words, recession is possible but not predestined.
Looking beyond the rest of the year, the U.S. is still on what we labeled a couple of years ago the bumpy journey to the new normal. This characterization will remain valid until either the system safely delevers, which will take a number of years, or policies are properly directed to remove the structural impediments in key areas such as housing, the labor market, public finances, infrastructure, and the banking sector.
2. What are the prospects for global growth? What areas do you think are strongest?
Global growth is also slowing as emerging economies tapped on the brakes to counter domestic overheating, and, more recently, market turmoil has spread even to countries with strong balance sheets.
Structurally, several emerging economies remain the best placed to resume strong growth over the medium term.
3. What's your outlook for short- to medium-term Fed policy?
The Fed is increasingly running out of policy options. Ironically, this is happening at a time when it will be forced to revise downward its still-bullish growth projections.