24 FEBRUARY 2016

Navigating Today's Uncertain Global Economy

Chief Economic Advisor, Allianz / Dr. Mohamed El-Erian

Global trends
Economic climate change

“We are coming to the end of the world,” said Mohamed El-Erian at a Feb. 24 AmCham luncheon at the Four Seasons Hotel Cairo Nile Plaza. “It is critical that we as a nation—you as businesses and as households—understand this.” Erian’s dramatic prediction was in fact referencing what he argues is the imminent end of the long-entrenched presumption of the slow, eternal growth of Western economies. In a speech titled “Navigating Today’s Uncertain Economy,” the chief economic advisor at Allianz, which co-sponsored the event, gave his take on the current global financial environment to a packed ballroom.

Erian pointed to recent daily 200-point shifts in the Dow Jones Industrial Average, oil prices that have oscillated by between 3 and 6 percent daily and the odd fact that “30 percent of global government debt is now at negative interest rates.” He maintained that these changes are symptoms of a new dynamic. Businesses and governments alike need to be flexible to respond to a fluctuating global economy, according to Erian. We should “embrace” this uncertain business environment, he added, rather than denying it. “We need three things to do this,” he said: “resilience, optionality and agility.” He added that “active inertia”—when businesses receive a signal but incorrectly interpret it—is something of which to be wary. To illustrate his point, Erian offered a metaphor that drew laughter from the audience: An American tourist in Paris asks a local for directions. The Parisian responds with an indifferent shrug that means “go away,” but the American responds by repeating his question but louder.

Erian added that developing countries need to “unleash their productive power.” As well as doing away with budget deficits in order to stave off inflation risks, emerging market countries should take a bigger role internationally, especially in advising neighboring nations. “If your neighborhood is a mess,” he pointed out, “the value of your house goes down.”

Audience questions tried to invite Erian to speculate on a strategy for Egypt’s economic recovery, but he demurred. “You think I’m elusive. I’m respectful,” he answered diplomatically. However, he did touch on several familiar points: “Egypt has a huge domestic market that has not been exploited yet. It has an incredible educated labor force, and the geographical location.” To make the most of its human and natural resources, the country needs “reform in the education system and private sector involvement to retool the labor force,” he said.

Erian stressed repeatedly that his was “an outsider’s point of view,” and that he is not an Egypt expert. However, he did say that the nation is “nowhere near where it should be,” considering its resources and economic potential. However, he noted that the problems Egypt faces, although significant, are far less serious than those of some other countries. Emerging economies face the challenge of being on the periphery of the global economy, while those at the center—Western nations—are unstable, he said.

Simply floating the Egyptian pound won’t solve Egypt’s economic troubles, continued Erian. “You cannot design an exchange rate policy in isolation of what else you’re going to do, and if you try, you will get it wrong.” Rather, there must be “a comprehensive policy response” to the issues Egypt faces after years of political turmoil, and the government needs to stick to a plan. “I look at this not as an engineering problem,” he said, urging public-private partnerships to solve the country’s woes. He said: “People are aware of what needs to be done.”