Warnings of a U.S. recession have come and gone in recent years, but have never materialized. However, Allianz chief economic adviser Mohamed El-Erian believes this time is different.
He said in an interview with Bloomberg TV last Friday that the disappointing July jobs report triggered a surge in recession concerns and that the market is now "screaming" about two things: growth fears and policy mistakes by the Federal Reserve.
El-Erian said this reflects the market's full awareness that the Fed's potential rate cuts may be behind schedule. "This is the first time I'm feeling a growth scare," he said. He previously wrote that if the rate cut is delayed until after September, the Fed's hopes for a soft landing may be dashed.
The Fed’s tightening cycle, which began in 2022, is the most aggressive in 40 years. Interest rates are now at their highest level since 2001. With interest rates rising, Wall Street’s consensus was that a recession would come in 2023. But the U.S. economy continues to grow, and the consensus has shifted to a soft landing.
El-Erian previously saw no need to worry about a recession, but people underestimated the lagged effects of the Fed's rate hikes, which are now having a bigger impact on the economy.
“I really worry that we could lose America’s economic exceptionality because of policy mistakes,” he said.
In recent years, this exceptional status of the U.S. economy has been reflected in outperformance in economic growth and financial markets, in contrast to other top economies. As other economies struggle to regain growth, investors withdraw capital and move it to the U.S.
Meanwhile, other economists believe the market is overreacting and don't think a recession is imminent.
Last Friday, Capital Economics said in a report that a recession is unlikely and that U.S. economic growth could even reaccelerate after a weak second half of the year.
“We do not expect risk sentiment to deteriorate further,” wrote senior market economist Diana Iovanel. “Overall, we doubt the economy can prevent another AI-driven bubble from heating up.”
Previously, El-Erian said that the main support for the U.S. stock market is the market's confidence in technology stocks, the economy and the Federal Reserve, and U.S. stock investors may not be able to rely on the Federal Reserve for rescue.
Article forwarded from: Jinshi Data
