Mohamed Aly El-Erian. Photo: MSC / Preiss via Wikimedia Commons
The financial markets see the Iran war as a short-term economic shock. Mohamed El-Erian, Wharton School professor and Allianz chief economic advisor, doesn't sound as optimistic.
"The market thinks that this will be a temporary and reversible shock because after all, we threw everything at the U.S. economy last year and the economy proved incredibly resilient," he said Monday on CNBC's "Squawk Box." This time, however, economic pressures, including an uncertain labor market and rising inflation, have been adding up.
Where the market sees an 80% likelihood the war is short term, El-Erian said he puts the number at 50%.
"We've got to stop thinking that oil supplies and supply chains are like an on-off switch. You can't turn it back on. If the UAE, Kuwait and Qatar stop production, it will take weeks to resume production," he explained. "There is an assumption in the market that it's days."
El-Erian doesn't expect a recession based on the war but does expect higher inflation — reaching 3.5%, or an average of 3% for this year — and lower GDP growth.
"We've got to understand that this global economy is subject to more violent and more frequent shocks, and there's a really good reason for that. We've lost the unifying themes, so we just have to be ready for a lot of volatility this year," he said.
"While the market nets things out, the economy compounds them. So if you put one shock after another after another, you lose financial resilience, you lose human resilience and your ability to bounce back is less. And we have thrown a lot at this economy in the last 12 months," El-Erian added, citing labor market concerns, inflation dynamics and what's happened in the financial markets.
The economist expects GDP growth to be about half a percent lower than would have been otherwise and inflation to be a percentage point higher, "and I'm expecting those central banks in Europe that have a single mandate are going to be hiking rates, and that's what the market also expects right now."
Credit: MSC/Preiss via Wikimedia Commons
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