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PIMCO’s El-Erian: Europe Headed for Recession

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Mohamed El-Erian, CEO and co-CIO of PIMCO, said that Europe is headed for recession next year and the region’s economy will shrink by 1-2%. The U.S., he added, will stagnate. He also said that volatility will persist because the right actions have not been taken by policymakers either in Europe or in the U.S.

Bloomberg cited El-Erian’s comments during a Sept.  24 interview in Washington as the PIMCO chief said, “For the next 12 months, the global economy will slow materially with advanced economies struggling to grow much above zero. Emerging economies will maintain faster growth, albeit not as high as the last 12 months.”

El-Erian spoke as world leaders gathered in Washington over the weekend for annual meetings of the International Monetary Fund (IMF) and the World Bank. The atmosphere at both meetings was decidedly negative as attendees grappled with the debt situation threatening to overflow from Greece to engulf the rest of the euro zone. Billionaire investor George Soros commented in the report that Greece may not be able to avoid defaulting on its debt; therefore, “something needs to be done” to protect European banks.

El-Erian added to his gloomy assessment of the future with an observation about volatility in an opinion piece on the Huffington Post that appeared Sunday. He said that European leaders “have little—and I stress, little—time left to get their act together.” Of the weekend meetings, attended by officials from nearly 190 countries, he said, “Think of it as a group therapy session.” Even though “discussions were robust and frank, and there was widespread realization that bold policy actions were urgently needed to avoid a further deterioration of economic growth, job creation, and income and wealth distribution,” there was still “too little progress.”

The result, he said, would be continued “frequent bouts of extreme volatility” until concrete action is taken. The longer the situation continues unresolved, he concluded, “the more likely [it is] that economic and market fragility will increase, the banking system in Europe will become even more vulnerable, and investors will join the growing number of companies that prefer to stand on the side of the road rather than be stuck in an erratically driven car.”