Market confidence in a US soft landing ignores three vulnerabilities that still pose a recessionary threat, economist Mohamed El-Erian told Bloomberg TV.
Though recent quarterly GDP growth has exceeded expectations, and inflation has broadly climbed lower in late 2023, it's not a given that these trends should continue.
"There's a real risk that growth slows to the one to one and a half percent level, with downside that we may slip into a negative quarter," he outlined.
The first headwind is a slowdown in consumer spending, dimming a key driver of last year's high-pace growth. Pandemic-era savings that boosted Americans' will to spend are now depleted, El-Erian said, marked by mounting household debt.
Wells Fargo recently shared similar concern, noting that holiday spending strength was a "last hurrah," instead of a signal of more to come. The bank expects a noticeable mid-year slowdown, contrasting Wall Street's soft landing consensus.
Secondly, inflation will also keep a recession on standby, as it's no given that it won't rebound, El-Erian warned. While November's surprisingly slower price growth sparked market bets that the Federal Reserve will start cutting interest rates, inflation ticked back up in December.
"I've said we are in the sweetest spot of the inflation reduction right now. It's going to get tougher going forward," he said. "And we've already seen from Europe that it's not out of the question that, not only does inflation stabilize, but once in a while you get the rate going up."
Worsening geopolitics pose a third challenge to growth, he added. Supply chain disruptions and delayed shipments are bound to pressure more price upside.
It's a consequence of turmoil in the Red Sea shipping lane, where attacks on cargo vessels by Yemen's Houthi rebels have resulted in a major reroute around Africa. As this adds to travel time, shipping rates have gone up, with other analysts warning that this could trigger a second bout of global inflation.
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