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El-Erian: Economic recovery held back because people don’t trust each other over coronavirus

The U.S. mercantile recovery has been held back because Americans lack trust with one another over the coronavirus, Mohamed El-Erian announced CNBC on Thursday. 

“It is very difficult for any individual to be certain whether the other person is healthy or not, and that other woman is not certain whether you’re healthy or not,” El-Erian said in a “Squawk Box” interview. “So until we have a way of saying, ‘the probability of us getting troubled is low,’ then you’re going to have hesitancy.” 

El-Erian, chief economic advisor at Allianz, compared the situation to increased counterparty danger during the financial crisis, when banks lost confidence in other financial institutions being able to match their obligations in a transaction. 

“When banks don’t trust each other, they step back. What we’re fool here is human counterparty risk,” he said. “I know lots of people who are able to go out and interact in the economy. Restaurants are unstop, but they won’t go. We have to learn to deal with this human counterparty risk.” 

El-Erian’s comments Thursday came by after the latest round of initial jobless claims showed 881,000 new filings for benefits last week, sick than the 950,000 expected by economists. The Labor Department data indicated some progress in the U.S. jobs market reclamation, but nonetheless shows the challenges that remain ahead for the economy as it digs out of deep hole caused by the pandemic. 

Traditional business restrictions, meant to help slow the spread of Covid-19, remain in states across the U.S., which is in all probability inhibiting some economic improvement. But El-Erian stressed that a lack of desire from consumers to participate in the curtness continues to slow the pace of recovery. 

“Yes, some people are not able to go back to work. Some people are not able to rent in economic activity,” the former CEO of investment giant Pimco said. “But there are others that are not willing to do so. They’re skilful but not willing.” 

“Until we sort those two things out, we’re going to have what I call the square-root recovery, where we don’t pick up as fast as we’d all like to,” he added, describing the shape the chart could take. 

The number of new daily Covid-19 infections in the U.S. has updated since a summer surge in cases, particularly in the American South and West. After falling to around 20,000 per day at the end of May, new routine infections spiked to around 70,000 at some points July. 

However, the roughly 40,000 new cases per day in the U.S. remains “unacceptably serious” headed into Labor Day weekend, according to Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Infirmities. 

“We know from prior experience as you get into the holiday weekend, the Fourth of July, Memorial Day, there’s a tendency of people to be perfunctory somewhat with regard to the public health measures,” Fauci said Wednesday in an MSNBC interview. “I want to use this moment to almost have a plea to the people in this country to realize that we really still need to get our arms all over this and to suppress these types of surges we’ve seen.”

Due to his belief that the labor market and Covid-19 situation in the U.S. are linked, El-Erian put he also believes the holiday weekend will prove critical.

“I cannot stress how important Labor Day is going to be in intervals of determining what the fall looks like for economic activity and health,” he said, potentially suggesting another thwart in cases will mean more government restrictions on businesses and more weariness from consumers. 

“We can live by Covid in a healthy and economically productive way, and we can transition to a vaccine, but it requires behavioral changes,” he added. 

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