Mohamed A. El-Erian, President of Queens’ College at the University of Cambridge, is a professor at the Wharton School of the University of Pennsylvania and the author of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse (Random House, 2016) and a co-author (with Gordon Brown, Michael Spence, and Reid Lidow) of Permacrisis: A Plan to Fix a Fractured World (Simon & Schuster, 2023).
CAMBRIDGE – What happens in the United States does not stay in the United States. The global economy depends on America to act as a main engine of growth, and global financial markets depend on US investors’ outsize appetite for risk. This became particularly evident in 2023 when major economies like Japan and the United Kingdom slipped into recession, Germany narrowly avoided one, and China grappled with obstacles to growth and pockets of high debt.
But whether the US economy can drive global growth in 2024 depends on the answers to three key questions. First, can the domestic economy maintain its current growth momentum and achieve the softest of soft landings? Second, can it remain resilient in the face of domestic political divisions and geopolitical uncertainties around the world? And lastly, will investors be able to secure sufficient liquidity to refinance debts accumulated during the era of artificially low interest rates and exceptionally high liquidity injections by central banks?
Based on current market prices, investors believe the answer to all three questions is a solid yes. Similarly, many economists are optimistic about the US economy, albeit with slightly less enthusiasm than that exhibited by capital markets.
I find myself taking a more nuanced view. Consider the three key issues.
The US economy undoubtedly holds two significant advantages over other major economies: its current growth engines are more dynamic, and it has taken significant measures to foster and invest in future growth drivers. This helps to explain why the US exceeded expectations in 2023, with GDP growing by 4.9% and 3.3% in the third and fourth quarters, respectively. By contrast, the German, Japanese, and UK economies contracted, while China, grappling with cyclical issues, risked being pulled into the dreaded middle-income trap.
These huge advantages set the US apart from other developed economies. Moreover, its comparative advantages will continue to strengthen unless other countries shift swiftly and decisively toward policies that support growth and increase productivity.
But the American economy also faces powerful headwinds. The US has entered 2024 with weaker household balance sheets, marked by lower savings and higher debt levels. This reduces the future effectiveness of consumer spending as a direct and indirect growth driver. Moreover, with inflation receding, there is a greater risk that the Federal Reserve’s overreliance on historical data will lead to another monetary-policy mistake.
These challenges are compounded by domestic and geopolitical uncertainties that have not been adequately reflected in market risk premia and economic assessments. The possibility of escalation in the Middle East is considerable as the already distressing number of civilian deaths and human suffering in Gaza rise further. The war in Ukraine risks tilting in a manner that threatens wider conflict over time. Meanwhile, the ongoing tensions between China and the US show little sign of abating. Elections this year in dozens of developed and developing countries add another layer of uncertainty, as political shifts could trigger new supply shocks and further weaponization of trade and finance.
The third issue is whether markets can navigate the refinancing legacy of excessive risk-taking fueled by years of artificially low interest rates, massive liquidity injections, and an unhealthy codependency between the Fed and financial markets. The commercial real-estate sector, where roughly $1.5 trillion in debt is set to mature by the end of 2025, is a prime example. But there are other areas of concern, especially within the lightly regulated and insufficiently understood non-banking sector.
It is important to note that these refinancing issues tend to unfold gradually. This has both advantages and disadvantages: while the slow pace mitigates the risk of massive contagion and sudden stops, it also erodes resilience and agility.
Together, all these factors challenge the automaticity of the consensus forecast of a very soft landing for the US economy and its ability to drive global growth. Indeed, looking ahead to the rest of the year, I would put the probability of a soft landing at 55%. There is also a 30% likelihood that the US will slip into a recession, and a 15% chance that continued transformational innovations – particularly in generative artificial intelligence, life sciences, and green technologies – will lead to surprise on the upside.
While the consensus entered 2024 with a much more optimistic view than a year ago, it needs to be more nuanced than what is currently reflected in market prices and economic forecasts. Think of a “yes, but” outlook, which calls for paying timely attention to the two tails of the distribution of potential outcomes.
