With anaemic worldwide economic growth, policy missteps from economic powerhouses like China and increasingly divided political parties in Europe and the US, pressure for sweeping change within the political and economic spheres is building.
“The system is trying to tell us something. When you grow at low levels as we have done since the financial crisis, tensions start to rise in the economic, political and financial space,” he said
El-Erian pointed to highly volatile global equity markets, an uneven policy approach by central banks and the rise to prominence of anti-establishment political groups in the US and Europe as causes for concern.
According to El-Erian, the global economic system is approaching the end of the current era, nearing a “T-junction” at which the markets could turn in one of two directions.
The first is essentially status quo, a world of sluggish growth and one in which any “milk toast Fed statement” causes a 200 point swing in the Dow Jones Industrial Average. In this scenario, triple-digit intraday movements in the Dow are the norm. El-Erian compared the era of easy central bank money to a doctor administering the incorrect medication to a sick patient, and the side effect being the slow-growth mode that the market has been stuck in.
The other option is renewed growth and increased stability in global markets, but this is dependent on a host of factors, including what El-Erian described as “structural reforms that unleash growth”, dealing with heavily indebted countries like Greece, and finally a more co-ordinated policy approach from central banks around the world.
“If we don’t see this, we’ll end up with low growth or recession. Inequality will get worse and volatility will get worse. The outlook is stark,” El-Erian said.
He warned listeners that those present in the room would fall into several categories when these paradigms begin to shift, but only those with the resilience to withstand change and the “agility” to react would succeed.
“We have lived in a very artificial world,” El-Erian said, referring to a long period of central bank easing. “But what comes next is not entirely clear. Start planning now to make sure you have the characteristics to navigate a bimodal world,” he said.