- The world economy is headed for a severe recession, warns Mohamed El-Erian.
- The economist expects “more uncertainty in the future as shocks become more frequent and more violent”.
- The recession could be long rather than “short and shallow”, he added.
Markets must prepare for a severe recession that could forever change the world economy, warned Mohamed El-Erian.
The economist said on Tuesday that a combination of supply pressures, central bank tightening, and market “weakness” are all likely to weigh on growth.
“Three new trends in particular are indicative of such a change 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 reason for the multi-year drag on growth, the end of unlimited liquidity from central banks, and the growing weakness of financial markets,” El-Erian wrote in a Foreign Affairs op-ed.
“These changes help explain many of the unusual economic developments of the past few years, and they are likely to drive more uncertainty in the future as shocks grow more frequent. and more violent,” he added. “These changes will affect individuals, companies, and governments – economically, socially, and politically.”
El-Erian’s warning comes as institutions including the International Monetary Fund and the Institute of International Finance predict an economic slowdown next year.
Russia’s invasion of Ukraine in February led to a tightening of global supply chains, driving up prices of commodities from crude oil to wheat.
Meanwhile, central banks such as the US Federal Reserve have begun to aggressively raise interest rates, which may begin to slow inflation but also hit economic growth.
The rate hike also exposed weaknesses in particular markets, with the S&P 500 down 15.5% this year and last year’s crypto success story turning sour after major exchange FTX suffered a solvency crisis and eventually filed for bankruptcy.
El-Erian said analysts need to move away from the mindset that the downturn will be a short, sharp recession — a way of thinking that he warned is driving the Fed’s attitude toward inflation as only “transitory” even though prices have been creeping up over the past year.
“From the US Federal Reserve’s initial misjudgment that inflation would be ‘transitory’ to the current consensus that a possible US recession would be ‘short and shallow,’ there is a strong trend to be seen the economic challenges seem to be temporary and easily reversible,” he said.
But “these changes will affect individuals, companies, and governments – economically, socially, and politically,” El-Erian added. “Until analysts wake up to the possibility that these trends will carry over into the next business cycle, the economic hardship they cause will likely outweigh the opportunities they create.”
Read more: Top economist Mohamed El-Erian says the FTX crypto fiasco will keep regulators up at night as they scramble to catch up
