There is not enough evidence for a short, shallow recession

  • There is insufficient evidence that the coming recession will be short and shallow, warned Mohamed El-Erian.
  • El-Erian noted that calls for a mild recession were similar to the ways people dismissed rising inflation last year.
  • “I hope we don’t end up in a recession, but if we do, there’s not enough evidence to suggest it’s short and shallow.”

Predictions of a next recession are too complacent, and there is not enough evidence that the next recession will be short and shallow, economist Mohamed El-Erian has warned.

“People are quick to say, ‘Don’t worry. If we do end up in a recession, it will be short and shallow.’ I say keep an open mind,” Allianz’s chief economic adviser said in an interview with CNBC on Monday.

El-Erian pointed to the similarities between calls for a mild recession and the insistence by some observers, including the Federal Reserve, that rising inflation is a “transient” phenomenon. Fed officials have since withdrawn that description, and inflation hit a 41-year high in June amid what critics have said was a sluggish policy response from the central bank. El-Erian suggested that current views on a recession may be making a similar mistake.

“I hope we don’t end up in a recession, but if we do, there isn’t enough evidence to suggest it’s short and shallow,” El-Erian warned.

However, other experts have pointed out that strong economic fundamentals could propel the US through a painful recession. Despite the Fed’s aggressive rate hikes, the labor market remains strong and household and private sector balance sheets remain on solid footing. Some economists, such as Wharton professor Jeremy Siegel, noted that inflation often lags behind official statistics, meaning high prices are likely already well below published figures.

But strong fundamentals are not necessarily “deterministic,” El-Erian said. In an opinion piece for the Financial Times on Monday, he warned that the insistence that a recession would be mild was in response to “worrying” economic conditions. He recently warned that the US was already heading for a stagflation problem and predicted that inflation would stagnate around 4% due to continued supply chain problems and changes in the globalization of the economy. US bonds are also showing signs of dysfunction, which could create stability problems in the financial system and stimulate “worrying volatility,” he added.

While he believes a recession was not inevitable and would not be as bad as 2008, he urged markets to prepare for a number of possible scenarios.

“Scenario planning for a broader range of possible outcomes is hard work and takes time, and much of it will eventually prove redundant. However, betting on a shaky consensus forecast could prove far more damaging,” he said.

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