Yahoo Finance These are the three biggest risks to the U.S. economy: El-Erian
While the U.S. economy still has ample room for growth, there are three big risks that could stand in the way, according to Allianz Chief Economic Advisor Mohamed El-Erian.
“The U.S. economy on a standalone basis is very easy to explain and to predict. Growth will continue,” El-Erian said on Yahoo Finance’s Influencers. “You could see 2.5% to 3% growth going on and on.”
El-Erian explained that there are three main risks that might dampen domestic economic growth.
First, the global economy. “The rest of the world is weakening. Europe is really slowing and is going to get near, what's called stall speed, where the risk of bad things happening goes up,” El-Erian said. “China is having enormous difficulty revamping its economy for the new realities that it is much larger and cannot depend on the outside world as the engine.”
A slew of recent data has illustrated a slowdown in China’s economy, and thus has sparked fear among investors and market watchers in the U.S. about the spillover effects. Moreover, U.S. manufacturing production unexpectedly fell for the second month in a row in February, according to Federal Reserve data released on Friday. The slump confirmed that the headwinds from the U.S.-China trade war and slowing global growth are starting to materially impact the U.S.
Second, El-Erian pointed to central banks around the world. “The second uncertainty has to do with central banks. They are in transition. We've never done this transition before. It's clear to me that one systemically important central bank can handle it. But can three systemically-important central banks do it? I don't know.”
Last week, the European Central Bank kept interest rates at record lows and extended cheap lending to banks in hopes to boost the weakening economy. Rather than calm market participants, the accommodative move by the ECB sent markets tumbling and as it confirmed investor fears about the European economy.
Finally, El-Erian expressed the third concern is the decoupling of asset prices from fundamentals caused by years of central bank support. He eluded to how sensitive the the stock market is to the Fed as market watchers saw at the end of last year when the stock market sold off in response to a more hawkish Fed.
“There's a question mark as to whether fundamentals can improve fast enough to validate asset prices, or whether asset prices come down.”
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Heidi Chung is a reporter at Yahoo Finance. Follow her on Twitter: @heidi_chung.
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