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El-Erian: The economy is approaching a 'pivot' point

Nicole Goodkind
Nicole Goodkind

The U.S. is currently in its seventh year of what can broadly be described as a bull market. Unemployment is at eight-year lows, and wages are rising. Things are good, but some economists fear that they’ve been good for too long and that recession is imminent. Mohamed El-Erian, chief economic adviser at Allianz, agrees. “Within the next two years, we’re not going to be able to maintain the world we’ve maintained for the last five to seven years,”  he says.

But the real question is what happens when we reach the end of the proverbial road. Do we careen off of a cliff? “We are coming to a point where we’re either going to pivot from low growth into recession and from artificial stability into instability or if the political class responds, we can pivot to something much better, but right now it’s uncertain.”

El-Erian believes we’re too dependent on finance as an engine of growth. Before the 2008 financial crisis, we embraced private finance as the major growth engine, he says. But after the crisis we embraced central banks, which don’t produce genuine growth. “So the reason why this road ends is that there’s a limit to how much growth finance can deliver.”

Unusual Uncertainty

Many major companies and economic powerhouses have cited uncertainty about what’s to come in earnings calls and interviews. There’s uncertainty over the presidential election, geopolitical issues, and central banks. But is this a valid excuse? After all, we can never be 100% certain about the future.

El-Erian believes that we’re in particularly uncertain times. “I don’t remember a world in which a third of government debt was trading at negative nominal interest rates. I don’t remember a world in which anti-establishment parties were gaining such traction on both sides of the Atlantic. I don’t remember a world in which we relied on one partisan instrument, which is central banks.”

To borrow a phrase from former Federal Reserve Chair Ben Bernanke, El-Erian says this is “unusual uncertainty.”