Mohamed El-Erian On Economic Growth, The Trump Administration And U.S. Market Dominance

When he appeared on CNBC’s Squawk Box, Mohamed El-Erian, president of Queens' College at the University of Cambridge and chief economic adviser at Allianz, said the possibility of a recession was “uncomfortably high,” with the chance of a soft landing being “meager.”

Two years later, on this week’s Walker Webcast, hosted by Walker & Dunlop CEO Willy Walker, El-Erian acknowledged that a recession hasn't materialized — but he added that a soft landing hasn’t occurred either. 

Instead, he said, the economy appears to be hovering in a “no-landing” situation.

“Inflation has gotten sticky, so we're not back to the 2%,” El-Erian said. “In fact, the Fed itself has acknowledged that, once again, it has been confounded by what has happened to inflation, so we are living in this ‘no-landing’ scenario where growth is robust, and it hasn’t reacted to what has been a significant increase in interest rates.”

El-Erian added that since inflation has stopped coming down, the markets have seemingly adjusted to the new environment, now expecting only one to two interest rate cuts this year. All of these factors indicate the U.S. lives in a world of “economic exceptionalism,” because compared to Europe and other parts of the world, it is performing very well.  

“The economy has proven really strong … almost immune to rate hikes,” he said. “Certain sectors like housing are not immune, but if you look at other sectors, it's done extremely well, and part of that is because corporations got ahead of the interest rate increases by prefunding a lot of their needs.”

Despite the economy's strong performance, some uncertainties still linger, as President-elect Donald Trump is set to take office in a few short weeks, El-Erian said. 

“The incoming Trump administration has signaled policy intentions in three areas,” El-Erian said. “One is tariffs, two is repatriation of illegal immigrants, and therefore a labor force issue, and the third is fiscal. Depending on where these things go, that’s going to have a huge impact, especially on the inflation side of the equation.”

El-Erian had previously mentioned that there could be two major economic impacts of the Trump administration: one component that involves deregulation and growth, and another component that involves the potential unsettling of the labor markets and tariffs. These components are essentially in a battle against each other. 

When Walker asked him which scenario will stimulate the economy more, El-Erian said deregulation will come out as the long-term winner. 

“I think of it as a 400-meter race, and who's going to win the race, in my mind, undoubtedly, is the deregulation side,” he said. “But in the first 100 meters — and maybe even in the first 200 meters, depending on what happens on tariffs — the other side may be in the lead.”

El-Erian added that there is a time and consistency aspect to the equation, because it is difficult to move quickly on all that Trump wants to accomplish economically. El-Erian said he suspects the market will see tariff announcements “pretty quickly” — something that could be very problematic for China and, to a lesser extent, Europe, Mexico and Canada. 

“At the end of the day, countries will offer something to the Trump administration to make sure that we don't get a massive tariff shock,” El-Erian said.

Additionally, American economic exceptionalism has acted as a continuous shield for the U.S. economy, even if people don’t talk about this concept as much as they used to, El-Erian said. This belief has protected the U.S. from “very messy” geopolitics, thus propping up the U.S. economy while other countries may have taken a tumble.

Walker said that almost 20 years ago, U.S. market capitalization comprised more than 40% of the global market. Europe followed at just under 40%, and Japan had about 10%. Fast-forward to 2024, and these numbers have drastically shifted. The U.S. now makes up 70%, Europe stands at 16% and Japan at 7%.  

“We're clearly too big to fail,” Walker said. “But do we get to a certain point where so much is coming to the U.S. that it actually isn't good, because we've lost the ability to grow?” 

Right now, the U.S. is sucking in capital from the rest of the world, and for good reasons, El-Erian said. 

“You make more money in the U.S. That is that simple,” he said. “Because of that, the capitalization of U.S. companies continues to go up, and the rest of the world continues to go down.”

While that trend seems positive for the U.S. economy, El-Erian said there are two important qualifications.  

“One is there's a concentration issue here [where] a few companies account for a lot of what's been happening, but the other thing is that we live in a world of interdependencies,” he said. “You cannot outpace the rest of the world without having the consequences of living in a bad neighborhood.” 

El-Erian said he keeps having to remind people that the house is only as good as the neighborhood it sits in. The global economic neighborhood is in a problematic state because of what's happening in China and Europe, and that spills over to other countries, he said.

In a global economic context, El-Erian referred to the U.S. as “the good,” China as “the bad” and Europe as “the ugly.”

“Europe has stopped investing in itself,” he said. “It is not focused on productivity enhancing. It is not focused on the growth engines of tomorrow, and it is stuck in this low-growth equilibrium. And when you get stuck in this low-growth equilibrium, the probability of bad things happening is high.”

China faces similar issues regarding economic growth, but in a different fashion.

El-Erian said China learns from others' experiences and often corrects its course, but in the past five years, there has been very little course correction. The way the Chinese economy is managed has changed. 

It now faces mounting pressure to rev up its economic engine to meet a 5% growth target. But for that to happen, the country has to “completely rebuild the engine,” El-Erian said. 

Walker said the U.S. is experiencing a period of massive investment, but many people still harbor uncertainty and recessionary fears, induced largely by political shifts and geopolitical risks. He asked El-Erian if business leaders should be all-in or if they should approach investment decisions with heightened caution. 

El-Erian said approaching the market with a balance of being risk-averse and risk-loving is a strategy that will pay off in the long run.

“I tell people to always ask yourself the question, ‘Do you structurally have resilience?’” he said. “‘Do you structurally have agility? Do you structurally have optionality?’ Because those are the three things that pay off in the world that we live in today.”

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This article was produced in collaboration between Studio B and Walker & Dunlop. Bisnow news staff was not involved in the production of this content.

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