US economy is weak though not headed for recession in 2016: Mohamed A El- Erian

The US economy is weaker than expected though not likely headed for recession in 2016, Mohamed A El- Erian said on Fox News’s ‘Sunday Morning Futures’ with Maria Bartiromo.

“We are experiencing a lot of volatility. Growth and wages are lower than where we could’ve been, but let’s not forget it’s an economy that creates a lot of jobs,” the Allianz SE’s chief economic adviser said.

Markets have been experiencing turmoil since the start of 2016. The US stock markets headed down with the Dow Jones Industrial Average sinking 8.3% in the first two weeks, reaching its lowest since September. For the first time in 12 years, oil is below $30 a barrel.

In addition, China is struggling to boost a slowing economy, calm a volatile stock market and get a handle on its currency. Central banks are no longer working together to suppress volatility to boost the asset values, he said. “Investors that are used to have favourable fiscal policies will have to get used to” a slower-growth environment, said El-Erian, who is also a Bloomberg View columnist.

El-Erian said he thinks the Federal Reserve is likely to raise the interest rates twice more — though very gradually — this year. “It’s a shallow hiking cycle. It will end much lower” than previous cycles, he said.

Meanwhile, global investors are expecting 2015 growth estimates from China on Tuesday. The level of concern US investors have put on China “is an over-reaction, but it’s an understandable one”, El-Erian said.

The Chinese government “can’t make up their mind. They lost control of the currency markets, which is very unusual”. “As I said a few months ago that investors needed to have a cash cushion, should get ready to put money in good companies that trade at cheap prices, we started to see that happen,” said El-Erian. “You don’t want to be fully invested. When a market has a downside bias, we are gonna hit a few air pockets.”

CHINA EFFECT: BRACE FOR WILDNESS IN MARKETS China’s decision to suspend a stock circuit breaker makes sense, but the way it is doing it and the timing don’t, said El-Erian. China realised that it had very tight limits, which did more harm than good, El-Erian told Bloomberg Television. “They realised this, which is good news. The bad news is they took it off at a very peculiar time and did so without a whole set of compensating measures,” said El-Erian.

“We should tighten our seat belt because I expect tomorrow is going to be a very volatile day in the Chinese markets, as the retail sector tries to exit and government entities try to buy.”

The China Securities Regulatory Commission announced the suspension of a new stock circuit-breaker that forced local exchanges to shut for the second day this week after shares fell 7% in intraday trading. The move added to worry that policy makers are struggling with how to contain the months-long turmoil in its financial markets.

Fresh concern that China’s slowdown will hamper global growth has wiped $2.5 trillion off the value of global equities this year, as the nation’s tolerance for a weaker currency is viewed as evidence policy makers are struggling to revive an economy that’s the world’s biggest user of resources.

US crude’s tumble toward $30 a barrel heightened fears of disinflation and fuelled concern that junk-rated energy producers won’t be able to stay solvent.