EL-ERIAN: The Economy Is Improving, But It Isn't Ready For The Fiscal Cliff

Mohamed A. El-Erian

Photo: Flickr | World Economic Forum

Recent economic data coming out of the U.S. has boosted spirits. Manufacturing has picked up driven by exports, some say the housing sector is reaching a bottom, consumers have more access to credit and companies are picking up on all this.But PIMCO CEO Mohammad El-Erian warns that this sense of relief should not be carried too far.

In his latest note published in Project Syndicate, El-Erian says there are structural problems that need to be addressed. He cautions against complacency and says the economy needs to recover from the “extreme medicine it received” i.e. fiscal stimulus and other policies enacted by the Fed:

“…For starters, the economy is not yet in a position to handle the 4-5%-of-GDP “fiscal cliff” that is approaching as all of the hard political decisions that were postponed come into view at the end of this year. The prospect of a disorderly fiscal contraction needs to give way to a more rationally designed approach that avoids undermining the fragile recovery. To accomplish that, the political class must avoid the bickering that almost sent America back into recession in 2011, and that raised major questions about the quality of the country’s economic governance.

Oil prices are not helping. Having already surged on account of Iran-related geopolitical concerns, they are altering American consumers’ behaviour, weakening their confidence, aggravating the country’s payments imbalances, and further reducing policymakers’ flexibility.

And then there is Europe, which is yet to overcome decisively its debt and growth problems. Like other countries, the US must continue to strengthen internal firewalls to limit its vulnerability to what is still a complex crisis across the Atlantic.

America’s full recovery is not yet guaranteed. A mix of steadfastness, caution, and good luck is needed for that to happen. And when it does, the country will be in a better position to repay its massive hospital bill.”

Read the entire piece at Project Syndicate.

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