- The global economy is heading for a severe recession, warned Mohamed El-Erian.
- The economist expects “more uncertainty in the future as shocks become more frequent and more violent”.
- The recession will be long rather than “short and shallow”, he added.
Markets must prepare for a severe recession that could forever change the global economy, warned Mohamed El-Erian.
The economist said on Tuesday that a combination of supply pressures, central bank tightening and market “fragility” were likely to weigh on growth.
“Three emerging trends in particular point to such a transformation and are likely to play a significant role in shaping economic outcomes over the next few years: the shift from insufficient demand to insufficient supply as a major multi-year drag on growth, the end of unlimited central bank liquidity, and the growing fragility of financial markets,” El-Erian wrote in a Foreign Affairs editorial.
“These changes help explain many of the unusual economic developments of recent years, and they are likely to generate even more uncertainty in the future as shocks become more frequent and severe,” he said. declared. added. “These changes will affect individuals, businesses and governments – economically, socially and politically.”
Meanwhile, central banks such as the US Federal Reserve have started aggressively raising interest rates, which may start to get inflation under control, but will also affect economic growth.
The rate hikes also revealed vulnerabilities in some markets, with the S&P500 a 15.5% drop this year and last year’s crypto success story turned sour after major exchange FTX suffered a solvency crisis and eventually filed for bankruptcy.
El-Erian said analysts needed to move away from the mindset that the slowdown would be a short, sharp recession — a way of thinking he said led the Fed to label inflation as simply “transitional” even as prices soared last year.
“From the US Federal Reserve’s initial misjudgment that inflation would be ‘transitory’ to the current consensus that a likely US recession will be ‘short and shallow’, there has been a strong tendency to view the challenges economic as both temporary and rapidly reversible,” he said.
But “these changes will affect individuals, businesses and governments – economically, socially and politically,” El-Erian added. “Until analysts realize the likelihood of these trends surviving the next economic cycle, the economic pain they cause will likely significantly outweigh the opportunities they create.”