America: Recession risk now 50% says top fund manager

The US stares a contracting economy in the face, at a time when the nation is already hurting badly.


The CEO of PIMCO, Mohamed El-Erian, has described the American outlook as "terrifying" in a report from Bloomberg. El-Erian warns that the risk of recession comes at a time when "unemployment is already too high, at a time when a quarter of homeowners are underwater on their mortgages, at a time when the fiscal deficit is at 9 percent and at a time when interest rates are at zero." 

His status alone, and the reputation of his firm, should make people sit up and take note. For autonomous California-based Pacific Investment Management Company employs 1,200 people and sits within the Allianz group, a major German financial services organisation. PIMCO manages some US$1trn in assets and is the world's largest bond investor. Furthermore, its Total Return Fund is the world's largest mutual fund. As well as being PIMCO's chief executive, El-Erian is the firm's co-Chief Investment Officer.

America's economy is already slowing, with the BBC reporting that the pace dropped to an annual rate of 2% in the last quarter. 

The six Republican and six Democrat members of the US congressional sub-committee set up last August and charged with reducing the deficit by US$1.2trn announced last Tuesday that it had failed to reach a deal. 

The American political system is now in deadlock, it seems. And President Barack Obama's administration is effectively a lame-duck executive limbering its way towards the 2012 presidential election.

At a time when the country desperately requires a forthright programme of government action, America is in a policy straightjacket. Exporting its way out of the doldrums might be a cute move, but even Obama's Pacific Century plan will take an age to get off the ground, as there's considerable work to be done to attract the Japanese into the Trans-Pacific Partnership (TPP). 

Export superpower Japan is dogged by "passionate protectionism", as The Economist describes it. The newspaper reports that Japan exports 65 vehicles to the US to every one it imports. In 2010 America's trade deficit with Japan amounted to a shocking c. US$60bn, and by September this year it had reached approximately US$43.7bn, according to the US Census Bureau.

The US exports less to the world than Germany, a country with a quarter the population. No wonder the Americans are so keen to attract Japan into the TPP. The Japanese ought to liberalise, in particular reform services to stimulate growth. To be sure, the world - and especially America - needs this rapidly to offset the possibility of Mr. El-Erian's fears being realised. The TPP is a regional free trade club and on 11 November Japanese Prime Minister Yoshihiko Noda announced negotiations to join. 

Ultimately the group may consist of Canada, Mexico, America, Australia, Malaysia, Peru, Vietnam, Singapore, Chile, New Zealand and Brunei. Plus Japan. The TPP would ultimately produce something like 40% of global GDP.  However, this is all a long way off and a vigorous thrust is required right now.

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