Pimco’s El-Erian: ‘New Normal Is a Stagnant Economy’

Monday, 31 Dec 2012 12:09 PM

By Dan Weil

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The fiscal cliff standoff adds another negative to a weak economy, says Pimco CEO Mohamed El-Erian.

A plunge off the cliff “isn’t the end of the world, but it’s not a good thing” he tells CNBC. “Two things anyone comes away with are dysfunction and polarization.”

The fiscal cliff means that unless Congress and the White House reach a deal Monday, $607 billion of tax hikes and spending cuts begin Jan. 1.

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

As for the economy, “the new normal is a stagnant economy with an overlay of political polarization and dysfunction," El-Erian says.

"The new normal is sluggish growth and persistently high unemployment and concerns about debt and deficits."

The political turmoil also increases the change of a “fatter tail,” or an economic outcome outside the norm, El-Erian says. “The fatter tail now is the possibility of slipping into recession."

Many economists agree with El-Erian on that score. Nigel Gault, chief U.S. economist at IHS Global Insight, tells The New York Times that the economy could shrink 0.5 percent next year in the event that the government fails to reach a budget agreement.

Even with the prospect of an accord, growth may slip to 1 percent in the first quarter, thanks to fiscal tightening, he says.

On the financial-market front, it’s only the Federal Reserve’s bold activism that is keeping investors from selling assets more heavily on the bleak political news, El-Erian says.

Editor's Note:
I Wish I Were Wrong — Economist Laments Being Right. See Interview.

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