Mohamed El-Erian warned that markets should prepare for a severe recession that could change the global economy forever.
The economist said on Tuesday that a combination of supply pressures, central bank tightening and market “fragility” is likely to weigh on growth.
“Three new trends in particular point to such a shift and are likely to play an important role in shaping economic outcomes over the next few years: the shift from insufficient demand to insufficient supply as a major multi-year impediment to growth, the end of unlimited liquidity from banks centralization, and the increasing fragility of financial markets,” El-Erian wrote in an editorial for Foreign Affairs.
He added, “These shifts help explain many of the extraordinary economic developments in the past few years, and are likely to lead to more uncertainty in the future as shocks become more frequent and more violent.” “These changes will affect individuals, businesses and governments – economically, socially and politically.”
Al-Erian’s warning comes as institutions including the International Monetary Fund and the Institute of International Finance predict an economic slowdown next year.
Russia’s invasion of Ukraine in February tightened global supply chains, with soaring prices for commodities from crude oil to wheat.
Meanwhile, central banks such as the US Federal Reserve are starting to aggressively raise interest rates, which can start to tame inflation but will also hurt economic growth.
Rising interest rates also exposed vulnerabilities in certain markets, with the S&P 500 down 15.5% this year. The cryptocurrency success story turned around last year after major exchange FTX suffered a solvency crisis and eventually filed for bankruptcy.
El-Erian said analysts need to move away from the mindset that deflation will be a short, sharp recession — a way of thinking he warned has led the Fed to describe inflation as merely “temporary” even as prices rose last year.
“From the US Federal Reserve’s initial miscalculation that inflation would be ‘temporary’ to the current consensus that a potential US recession will be ‘short and shallow,’ there has been a strong tendency to see economic challenges as temporary and reversible,” he said.
“These changes will affect individuals, companies and governments economically, socially and politically,” El-Erian added. “Until analysts wake up to the potential for these trends to persist beyond the next business cycle, the economic hardships they cause are likely to vastly outweigh the opportunities they create.”