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December 10, 2010 at 11:32 AM
Mohamed El-Erian, PIMCO’s highly influential CEO, gave succor to the U.S. stock market rally when he raised his firm’s forecast for U.S. growth next year.
In an interview with Bloomberg, El-Erian said he expected the economy to grow 3% to 3.5% in the fourth quarter next year from the same period this year. That range is 100 basis points over PIMCO’s previous forecast.
Tempering the positive growth expectations, El-Erian (left) commented: “What we don’t know yet is whether that will be enough not just to change the economy’s trajectory for one year but to place it on a medium-term sustainable path. What the policy makers are doing is kicking the can down the road in response to the symptoms of the new normal, but they’re not yet changing the medium-term dynamics.”
The downcast commentary seemed to take away with one hand what he presented (the growth forecast) in the other. This can be explained by El-Erian’s view that the positive results for the U.S. economy stem from policymakers’ hocus pocus. “The U.S. is using fiscal and monetary policy to try to attain escape velocity for the economy,” El-Erian said, citing “increasingly unconventional” strategies to boost U.S. growth, an apparent reference to QE2.
If the sum of El-Erian’s remarks about U.S. economic prospects were lukewarm, the PIMCO chief seemed to have only cold water for Europe, which he forecast to grow by 0.5% to 0.75% next year. “Europe is on a completely different track than the U.S. It is trying to achieve sustainable growth by getting its economic house in order through fiscal austerity.”
There, the European Central Bank is “basically providing liquidity support for a solvency issue. The question is whether the market will cooperate with that. If it doesn’t, he added, you will get disorderly restructurings in some peripheral countries and even more economic contraction.”
The disparate forecasts hint to a traditional difference in European vs. American thinking. The Old World has rejected U.S. stimulative measures from the start of the crisis, focusing on budget cuts. In the U.S., though disagreements between Democrats and Republicans can be vociferous, there is a much wider consensus on the merits of fiscal stimulus, albeit with different emphases. The Democrats favor spending whereas the Republicans favor tax cuts — both of which deplete the Treasury.
