Mohamed El-Erian says there are four issues that will shape the future of the global economy. Markets have been on “a rollercoaster ride” as banking tremors pile on to investors’ concerns. El-Erian say the Fed’s efforts to reduce inflation and the US debt ceiling are key factors looking ahead. Loading Something is loading.
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It is an uncertain time for the global economy.
As narratives continue to shift, Wall Street’s views range from predictions of a full on stock market crash to a soft landing of the economy. The US central bank, meanwhile, has given mixed signals on the Fed’s next move since prices began rising in 2021, with Jerome Powell previously assuring everyone that inflation was “transitory” before walking that back when it became apparent the opposite was true.
“And it is not just market narratives that have seen volatility,” famed economist Mohamed El-Erian wrote in an op-ed for the Financial Times “Moves in key segments of financial markets have also been akin to a rollercoaster ride.”
What’s definitely the case is that there’s a lot of uncertainty about what comes next.
While it can be difficult to piece together a coherent outlook, El-Erian says there are actually four factors that are guiding the trajectory of the world economy right now:
1) “First, there is the less elastic supply side of the economy as the world navigates the energy transition, labour market tightness, corporate rewiring of supply chains and the manner in which geopolitical tensions are changing globalisation.”
2) “Second is the Fed’s ability to reduce inflation while containing the damage to jobs and growth and maintaining financial stability — the policy trilemma.”
3) “Third is the extent of adverse economic contagion arising from the recent tremors in community and regional banks, including First Republic’s fragility and the overall impact on bank lending of higher funding costs, greater loan loss provisions, a less stable deposit base and the likely onset of tighter supervision and regulation.”
4) “And fourth is the ever more complicated relationship between economics and politics, both domestically (including the US debt ceiling) and internationally (including how national security considerations trump economic ones).”
Moving forward, the top economist says the Fed, and large institutions, must adapt quickly and be open to new ideas on handling a murky and unprecedented macro environment. There’s likely to be more financial stress for firms and turmoil hitting areas of the economy like commercial real estate, if they can’t quickly adjust to new realities.
“For the wellbeing of the country, it is incumbent on these institutions to be more open to self-disruptions and for their governance structure to involve stronger accountability,” the report reads.
El-Erian added: “Without that, the steadying and guiding role of US institutional maturity will weaken even faster in the face of eroding credibility, turning this once dominant US comparative advantage into an even greater source of domestic and global instability.”