President Donald Trump’s extensive raft of import tariffs are putting the U.S. economy at risk of recession, Allianz’s Chief Economic Advisor Mohamed El-Erian warned on Friday.
He added that Trump’s swathe of so-called reciprocal tariffs could have a significant effect on the global economy.
“You’ve had a major repricing of growth prospects, with a recession in the U.S. going up to 50% probability, you’ve seen an increase in inflation expectations, up to 3.5%,” he told CNBC’s Silvia Amaro on the sidelines of the Ambrosetti Forum in Cernobbio, Italy.
“I don’t think [a U.S. recession] is inevitable because the structure of the economy is so strong, but the risk has become uncomfortably high.”
Trump’s tariffs are being rolled out just as signs of weakness are starting to show in the American economy. Last month, fund managers, strategists and analysts told CNBC that they saw a slowdown on the horizon, with the risk of a recession rising to a six-month high.
El-Erian said he believed the U.S. economy would expand by between 1% and 1.5% this year, noting that this represented a “significant change in the growth outlook” when compared with the IMF’s projection of 2.7% U.S. growth made earlier this year.
“If we get close to 1%, we get close to what’s known as ‘stall speed,’” he said. “The economy isn’t going fast enough to allow for the sort of resource reallocations that you need. So once you get closer to one, which I hope we don’t, the recession risk will go up significantly.”
Aside from warning about the state of the U.S. economy as tariffs come into play, El-Erian also said that markets were underestimating the inflation impact of Trump’s aggressive trade policies.
He further warned that markets were underestimating the inflation impact of the tariffs regime.
“The first reaction has been concerns about growth. We haven’t had two other reactions yet: what will happen to growth in other countries, and that makes a question mark on whether the dollar weakness will continue, and then what does the [Federal Reserve] do?” he questioned.
