Tags: El-Erian | Cliff | Deal | Growth

El-Erian: Cliff Deal Doesn't Guarantee Robust Growth

Monday, 17 Dec 2012 05:39 PM

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Even if the White House and Congress put political differences aside and navigate the economy away from the year-end fiscal cliff, growth could still come in sluggish next year, said Mohamed El-Erian, CEO of fund giant Pimco.

Sweeping tax increases are due to take effect at the end of this year at the same time deep cuts to government spending kick in, a combination known as a fiscal cliff that could tip the country into recession next year.

The White House has insisted fiscal reforms must include tax hikes on those bringing in over $250,000 a year, a proposal that found strong opposition at first among Republicans, though the GOP appears to be warming up to the idea of higher taxes for the wealthy in exchange for spending cuts elsewhere.

Editor's Note: Tiny Loophole Found in 70,320 Page IRS Tax Code Could Pay $87,500

Successfully avoiding the cliff ups the chances of avoiding recession but won't guide the economy to a path of strong growth and rapid recovery, El-Erian told CNBC.

"If we avoid the fiscal cliff, which is our expectations, if we avoid it we're still looking at sluggish growth of 1.5 percent to 2 percent next year," he said.

"The deal is important, not only whether we get one or not, because if we don't get one, this economy goes into recession. That's the last thing we need."

Even if both sides come to an agreement, more hurdles remain: the debt ceiling must be raised again, housing recovery remains questionable and the labor market stands lots of ground to make improvement.

"We need this as a building block for a lot of other decisions going forward: the debt ceiling, the annual budget, the labor market, housing finance," El-Erian told the network.

"There's a ton of things on the plate of politicians."

Hopes that both sides will strike a deal to avoid the fiscal cliff continue to rise after House Speaker John Boehner reportedly offered a plan that would hike taxes on those bringing in $1 million or more.

Market watchers are expecting a deal to materialize at the last minute.

"They're going to come up with a solution closer to the end of the year," said Bernard Kavanagh, vice president of portfolio management for St. Louis-based broker Stifel Nicolaus, according to CNNMoney.

"It's political suicide if they don't."

Editor's Note: Tiny Loophole Found in 70,320 Page IRS Tax Code Could Pay $87,500

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