Mohamed El-Erian, CEO of PIMCO, predicted on Thursday that the European Central Bank (ECB) will cut interest rates to deal with the increasing odds—now 50%—that the euro zone will plunge into a recession. At the same time he added that the U.S. stood a 33%–50% chance of another contraction.
In a Bloomberg report, El-Erian was quoted saying, “I would expect the ECB to change course. They’re going to be pushed to do so.” And in fact on Friday economist members of the shadow council of the ECB were doing just that, calling for a reduction in the 1.5% interest rate back to where it was at the beginning of the year: 1%.
El-Erian compared the European crisis to the subprime meltdown experienced in the U.S., saying that problems in a small sector of the economy—in the case of the euro zone, Greece—could spread to envelop the entire region. “The dynamics are very similar to what we saw here,” he said of the situation, adding that there was “definitely” a risk Europe could pull the rest of the world’s economy down with it.
The euro zone’s growth has slowed to less than a crawl, from 0.8% in Q1 to 0.2% in Q2, with Germany’s economy at a standstill in the midst of the sovereign debt turmoil that has wracked the region. The ECB shadow council, which is a group of 15 economists and portfolio managers who keep track of economic developments and monetary policy within the 17-nation region, provide recommendations each month based on their observations. And what they are seeing is not pretty.
Member Julian Callow, chief European economist at Barclays Capital in London, said in the report, “My recommendation is for the ECB to lower the policy rate by 50 basis points as insurance to lower the risk of outright recession re-emerging. The economic deterioration has become sufficiently rapid and alarming to warrant an immediate unwinding of the ECB’s rate hikes.”
And Marie Diron, senior economist at Oxford Economics in London, was quoted saying, “Should the growth outlook worsen, the ECB may need to lower interest rates below 1% given the impossibility of fiscal stimulus.”