Investors and economists have been sounding the recession alarm, and Allianz chief economic adviser Mohamed El-Erian (Mohamed El-Erian) emphasized in the latest article that people tend to be optimistic about economic challenges as “temporary and manageable”. rapid reversal”, but the reality is that the world is in the midst of a profound economic and financial transformation.
He cited the economic theory that the world economy enters a recession when one business cycle reaches its natural end and before the next cycle can actually take off.
But he said there would be no turning of the “economic wheel” this time because he saw the world going through major changes that would outlast the current business cycle.
El-Erian said there are three trends that are shifting the global economy. The first transformational trend is the shift from insufficient demand to insufficient supply, the second is the end of unlimited central bank liquidity, and the third is the growing fragility of financial markets.
The first shift, he noted, was driven by the pandemic, starting with the shutdown of the entire system and government stimulus, a “massive handout” that led to a surge in demand much earlier than supply.
El-Erian said the supply problems stemmed not just from the pandemic, but from Russia’s invasion of Ukraine, which led to sanctions and geopolitical tensions, as well as widespread labor shortages. The impact of supply chain disruptions is long-lasting, and outsourcing to distant locations is no longer reliable, reflecting the changing nature of “globalization”.
“To make matters worse, these shifts in the global economic landscape have coincided with central banks fundamentally altering their approach,” El-Erian said, with the Fed slow to respond and failing to realize that inflation had become entrenched in the economy. , and then aggressively raised interest rates to make up for lost time.
He believes that the market has become accustomed to expecting the central bank to provide easy funds, and the negative impact of this situation is that a large part of global financial activities has poured into asset management, private equity and hedge funds, which are inherently very vulnerable.
El-Erian noted that the fragility of the financial system also complicates the work of central banks, which currently face a trilemma: how to reduce inflation, protect growth and employment, and ensure financial stability.