Mohamed El-Erian, Chief Economic Advisor at Allianz, has raised concerns that U.S. recession risks are now "uncomfortably high," largely due to President Donald Trump’s trade policies. He noted that the probability of a U.S. recession has risen to 50%, alongside increasing inflation expectations, now at 3.5%.
Although El-Erian does not consider a recession inevitable, he warns that the economy is weakening. He expects U.S. growth to slow to between 1% and 1.5% this year, a sharp decline from the IMF’s earlier projection of 2.7%. If growth approaches 1%, the economy risks reaching "stall speed," meaning it may struggle to reallocate resources efficiently, significantly increasing the likelihood of a downturn.
Beyond concerns about slowing growth, El-Erian believes markets are underestimating the inflationary impact of tariffs. The Federal Reserve’s key inflation gauge recently showed its biggest monthly increase in over a year. While market expectations suggest four rate cuts this year, El-Erian predicts only one at best, adding that if the Fed follows a more traditional approach, it might not cut rates at all.
Following Trump’s tariff announcements, European currencies surged against the U.S. dollar, with the euro and British pound hitting six-month highs. However, El-Erian does not expect long-term dollar weakness, arguing that while U.S. growth may slow, other economies will slow even more. As a result, he believes the dollar’s decline will not be sustained.
Ultimately, El-Erian highlights ongoing economic uncertainty, noting that while there is broad agreement on the short-term pain caused by tariffs, experts remain divided on whether they will yield long-term gains. "Can you make a case that this is pain now for gain later? Yes. Can you make it with conviction? No," he said.