If evaluating the global economy as a whole, the picture is looking slightly better than last year. But looking at the big picture can be deceiving—it conceals much more than it tells you, said Mohamed El-Erian, the former CEO and co-CIO of PIMCO and Allianz’s chief economic advisor.
The global economy is incredibly dispersed, he said, speaking at the LinkedIn FinanceConnect conference in New York Thursday.
Comparing the global economy to a classroom at the beginning of a new school year, El-Erian says there are top students who are getting better, students in the middle who aren’t going to do anything very exciting, a few students who will struggle, and the potential troublemakers in the back who could completely disrupt the class.
“Certain parts of it, U.S., India, are improving,” El-Erian says. “The middle part is the Chinas of the world; they’re stabilizing. Then you have Europe, which can easily tip into recession. And then you have the troublemakers: Russia, Ukraine, Greece, Venezuala, Brazil and Nigerias—any one of them can disrupt the whole class.”
While these countries may have been the emerging market darlings in the past, today, they’re wildcards. El-Erian says it’s hard to be a small economy on the periphery. These countries are often flooded with capital, overwhelming the system, and suddenly that capital sprints out. “You go from feast to famine and somehow you have to manage that process, and most these countries cannot do that,” he says.
Russia is going on what El-Erian calls “geo-political adventures” to distract its citizens from problems at home, which, in turn, creates different problems.
China, a favorite in the past, is now in the middle of the class, and in for a “soft landing,” El-Erian says. The country previously experienced 10 percent annual growth, but that’s a “harder and harder thing to do,” he says. Now the country is experiencing a 6-7 percent growth rate, which is still good, but down from the highs of the past.
El-Erian is optimistic that China can manage this growth process, saying the Chinese have the “ability to learn and course-correct.” El-Erian also dismissed the concerns about shadow-banking and potential bubbles, saying China has a ton of money to throw at these problems. Perhaps the biggest threat to China’s future stability is its long-term ability to transition from an adolescent to an adult—the middle income transition.
“Only five countries have managed that middle income transition well, and none of them have been as complicated as China,” El-Erian says. “China is trying a very important secular shift. My own feeling is that they’ll do it, but I understand why there’s some uncertainty out there.”
In the West, El-Erian predicts the U.S. will bounce back relatively quickly to 2-3 percent, while Europe is going to grow between 1 and 1.5 percent. But within Europe, Greece continues to be a concern. “We should worry that 26 percent of working population is still unemployed and 55 percent of the youth have no jobs,” he says. But don't worry that the country will bring down the Eurozone, El-Erian says. “There’s been a lot done in the last five years to strengthen the Eurozone, so Greece is no longer a threat.”
There’s only a 5 percent probability that there will be a breakthrough in the Greek debt situation, that people come together and have an honest conversation and that Greece and its creditors do what’s needed to put Greece on a sustainable path, he says.
El-Erian believes there’s a 50 percent chance Greece will leave the Eurozone. It is possible that Greece defaults and then stays in the Eurozone, but he says it would make no sense at that point for the country to do so.
