Celebrated economist offers mostly rosy 2018 forecast — except for oil
‘Biggest engines of global economy all shifting up,’ El-Erian says
Calgary business leaders had the rare opportunity to hear Mohamed El-Erian, among the world’s leading economists, issue his forecast for 2018 on Thursday night.
The Calgary event, hosted by the Chartered Financial Analyst Society in Canada, is annually the organization’s most successful. And this week’s gathering — its 41st — was likely among the best.
El-Erian is not bullish about oil prices.
It was as if he’d been given a preview of International Energy Agency numbers released Friday, which forecast U.S. crude production to not only reach record levels, but surpass Saudi Arabia and challenge Russia as the world’s largest oil producer.
The report also stated this rise in production — despite previous OPEC cuts and increased demand — was unlikely to be offset by drops in Venezuelan production or decline rates in other fields around the world.
El-Erian, chief economic adviser at Allianz, the corporate parent of Pacific Investment Management Co. where he was CEO and co-chief investment officer between 2007 and 2014, cited the expected growth in production as a key reason oil prices are unlikely to continue rising.
Unlike past CFA dinners, ElErian didn’t offer up an oil price forecast, which — in addition to returning to defend their forecasts the following year — is what speakers were once required to do
He sees energy’s challenges as rising shale production, the discipline needed to maintain production cuts by the Organization of Petroleum Exporting Countries — including non- OPEC actors such as Russia — and the need to see demand increase.
El-Erian said the oilpatch should expect a stable or lower oil price, with one reason being OPEC’s resolve has not been tested at high oil prices. Expectations are that higher oil prices will encourage more shale drilling, and it’s hard to predict OPEC’s response to that.
If prices do rise, he suggested companies and governments treat it as a windfall, not a sign of things to come.
It’s therefore a good thing Alberta Finance Minister Joe Ceci was in the room Thursday.
Oil aside, El-Erian is bullish on the broader commodities space.
The current growth phase needs to be seen as different than what underpinned previous periods of economic gains because it is not financially driven, he said.
It is not underpinned by leverage or debt or unconventional monetary policy — such as the quantitative easing put in place in the wake of the 2008 financial crisis that only began to shift in 2017 — on the part of central banks, said El-Erian.
“There are signs of a virtuous cycle between consumption, investment and trade,” he said.
Among the reasons for the optimism is the fact pro-growth policies are in place that will benefit companies, households and consumers.
But it’s also important to ing majority of countries in the understand some events did not world are experiencing higher occur in 2017, which has congrowth,” said El-Erian. tributed to the current rosier For investors in the room, his outlook, he said. perspective was that valuations
These include the lack of a — with the exception of oil — policy mistake by the U.S. Fedwill be supported by economic eral Reserve, the absence of trade growth. The oil price will depend disruptions despite the rhetoric on OPEC. on the Trans Pacific Partnership El-Erian offered three potenand the North American Free tial risks to his forecast — a deteTrade Agreement, inflation rates rioration in relations between that remain under thresholds North Korea and the rest of the established by central banks and world, upheaval in the Middle bond yields not rising despite East and policy mistakes made strong economic growth. by central banks, excluding the
“Lots of things didn’t happen U.S. Federal Reserve. in 2017, that people expected One could make the argument or worried would happen, and that there is a fourth risk — the ironically they were pro-growth,” unpredictability of U.S. President said El-Erian. Donald Trump and the conse
What is happening, he said, is quences of his policy-by-tweet the T-Junction, a phenomenon approach.
El-Erian wrote about in his 2016 But there was nary a mention book, The Only Game in Town: of Trump during El-Erian’s preCentral Banks, Instability, and sentation, nor was there discusAvoiding the Next Collapse. sion about China’s economy and
In the world of economics this the potential risks associated describes a state where the turn with that country moving to be an economy takes at a junction less export-driven more focused will determine whether it moves .on domestic demand — and all toward a period of real and the structural reforms that go inclusive growth, or one characalong with making that happen. terized by financial instability, To be fair, El-Erian didn’t have protectionism and economic all night. And in the time he did stagnation. have, he gave the audience plenty
Judging from El-Erian’s comof data points and a comprehenments Thursday, the global sive, if not wholly optimistic, economy has turned toward analysis of what’s in store for the inclusive growth, despite the global economy in 2018. rhetoric heard on a daily basis. Optimistic on all fronts, except
“The biggest engines of the energy, which is arguably what global economy are all shifting the Calgary audience really up at the same time. If you look wanted to hear. at the projections of various international organizations, they show that the overwhelm-
The overwhelming majority of countries in the world are experiencing higher growth.