Brace for 'violent' shocks that may reshape the global economy forever, warns top economist Mohamed El-Erian
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Markets should brace for a protracted recession, Mohamed El-Erian has warnedShannon Stapleton/Reuters
The global economy is headed for a severe recession, Mohamed El-Erian warned.
The economist expects "more uncertainty in the future as shocks become more frequent and severe."
The recession will be protracted rather than "short and superficial," he added.
Markets should brace for a severe recession that could change the global economy forever, Mohamed El-Erian warned.
The economist said on Tuesday that a combination of supply pressures, central bank tightening and "fragile" markets were likely to weigh on growth.
“Three emerging trends in particular point to such a transformation and are likely to play important roles in shaping economic outcomes over the next few years: the shift from insufficient demand to insufficient supply as a major multi-year drag on growth, the end of boundless central bank liquidity, and the increasing fragility of financial markets," wrote El-Erian in a foreign affairs op-ed.
"These shifts help explain many of the unusual economic developments of recent years, and they are likely to create even more uncertainty going forward as shocks become more frequent and severe," he added. “These changes will affect individuals, businesses and governments – economically, socially and politically.”
El-Erian's warning comes as institutions including the International Monetary Fund and the Institute of International Finance forecast an economic slowdown over the next year.
Russia's February invasion of Ukraine has tightened global supply chains, with prices for commodities from crude oil to wheat soaring.
Meanwhile, central banks like the US Federal Reserve have started aggressively raising interest rates, which could gradually dampen inflation but will also hurt economic growth.
Rate hikes have also exposed weaknesses in certain markets, with the S&P 500 falling 15.5% this year and last year's crypto success story turning sour 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 the downturn will be a short, sharp recession -- a mindset he warned the Fed has classified inflation as merely "temporary," even as prices increased in the past year.
“From the Fed's initial misperception that inflation was 'temporary' to the current consensus that a likely US recession will be 'short and shallow,' there has been a strong tendency to view economic challenges as both temporary and also quick to see reversible.” he said.
But "these changes will affect individuals, businesses and governments - economically, socially and politically," El-Erian added. "Until analysts become aware of the likelihood that these trends will survive the next business cycle, the economic difficulties they create will likely far outweigh the opportunities they create."
Read more: Top economist Mohamed El-Erian says FTX crypto fiasco will keep regulators up at night as they scramble to catch up
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