El-Erian Sees Worse Recession Ahead

(The Tradable) Mohamed A. El-Erian, the chief economic adviser at Allianz, recently highlighted data from The U.S. Bureau of Economic Analysis of the country’s real GDP. He supplemented it with the bleak outlook that contraction is likely to continue in Q2 2020.

The chart El-Erian described to his audience reflects how much each quarter’s GDP growth rate rose or fell from the previous one. It is obvious that for several years, each quarter’s GDP was higher, which reflected economic expansion. 

As the global economy largely came to a halt, the U.S. real GDP took a hit. The country’s real GDP in Q1 2020 contracted over 4 percent in comparison to Q4 2019. This signifies that the U.S. economic output adjusted for inflation has substantially declined.

What makes matters worse, El-Erian expects the result for Q2 2020 to be in the range of 30-40% on the negative side of the Y-scale. This means that the real GDP in Q2 2020 is likely to show even more severe contraction compared to Q1 2020.

The current speed of the economic contraction is the highest since the last recession of 2008-09. Such an outcome is expected when a large part of the total GDP . . . consumer expenditures . . . shrinks.

While the economy is slowly reopening, there are no guarantees that the economy will bounce up immediately. Even Jerome Powell claimed that the full recovery may take up until the end of 2021.

Businesses are currently between a rock and a hard place. The global economic downturn caused a decline in demand from one side and the disruption in supply chains from the other. Given such circumstances, El-Erian's expectations of further contraction seem reasonable.


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