Updated Saturday, April 19, 2014 as of 2:58 AM ET
Portfolio - Investment Insights
Pimco’s El-Erian: Faster Global Economic Growth in 2014
by: Rich Miller
Tuesday, December 10, 2013
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(Bloomberg) -- World economic growth will pick up next year, paced by improvements in the U.S. and the euro area, Mohamed El-Erian, chief executive officer of Pimco, said in an interview.

The Newport Beach, California-based asset manager said the the world economy is likely to expand 2.5% to 3% in 2014, up from 2.3% this year. U.S. growth will accelerate to 2.25% to 2.75% from 1.8%.

“The U.S. economy is healing,” El-Erian said in an interview. “Household balance sheets are in a better place.”

El-Erian, whose firm has $1.97 trillion in assets under management, said it’s virtually certain the Federal Reserve will begin moderating its asset purchases by the end of March, with a 50-50 chance of a move next week. He said the Fed is likely to couple any tapering announcement with a cut in the interest rate it pays on banks’ excess reserves and a strengthened commitment to keep monetary policy easy for an extended period.

The euro region’s economy will expand by 0.25% to 0.75% in 2014, after contracting 0.4% this year, he said.

Pimco’s latest projections for growth of the world, U.S. and euro area economies over the next year were fleshed out on Dec. 6 after a series of strategy meetings. They are each a quarter percentage point higher than the firm’s previous forecasts, issued in September, for the 12 months ahead.

JOB MARKET

The Pimco executive said he was heartened by the broad- based improvement in the U.S. job market last month. Payrolls increased by 203,000, while the unemployment rate fell to 7% from 7.3% in October, the Labor Department reported on Dec. 6. The employment-to-population rate also rose while hourly earnings increased.

“The breadth of improvement was notable,” El-Erian said.

The Fed’s “hyperactive” monetary policy has given the U.S. economy time to mend after its deepest recession since the Great Depression, according to El-Erian.

The Fed is buying $85 billion of bonds per month. It has also promised to keep its target for the federal funds rate near zero at least as long as unemployment remains above 6.5% and forecast inflation is not above 2.5%.

“You’re looking at a transition where the Fed will remain engaged but will alter its policy mix,” by gradually reducing its bond buying while strengthening its forward guidance on short-term interest rates, he said.

He said he expects the Fed to cut the 0.25% rate it pays commercial banks on excess reserves as part of that transition. While such a move would not have a “dramatic impact,” it would underscore the Fed’s commitment to keeping rates low, he said.

MUSHROOMING RESERVES

Banks’ reserves have mushroomed as the Fed purchased securities from them in its bid to lower long-term interest rates. Banks currently have more than $2 trillion in extra cash at the Fed, according to data from the central bank.

Even as the economy improves next year, it won’t achieve “escape velocity,” according to El-Erian. The big missing ingredient is stepped-up capital spending by companies.

“We have yet to see business investment really pick up,” he said. “Companies still prefer to use their excess cash for financial engineering” such as buying back shares or boosting dividends.

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