U.S. should take steps to improve its long-term competitiveness

U.S. should take steps to improve its long-term competitiveness and reduce its budget deficit over the medium term after using a "large amount" of encouragement to spur economic growth next year, Mohamed El-Erian, chief executive of Pacific Investment Management Co. he said.

"The U.S. is using the fiscal and monetary policy to try to reach the escape velocity for the economy," said El-Erian said in a telephone interview yesterday from his office in Newport Beach, California. "We do not know if that will still not be enough just to change the trajectory of the economy for a year, but to put on a medium-term sustainable path."

Pimco, which manages the world's biggest bond fund, raised its forecast for growth next year in response to stimulation, he said. Now sees the economy growing 3 percent to 3.5 percent in the fourth quarter of next year over the same period this year. That compares with its previous estimate of 2 percent to growth of 2.5 percent and 2.2 percent forecast profit for this year by the International Monetary Fund.

U.S. stocks extended gains after news that Pimco had raised its forecast for U.S. growth 2011. 500 Standard & Poor's rose 0.4 percent to 1233.00, closing yesterday at its highest level since September 2008.

Pimco ago began using the term "new normal" almost two years to describe the changing state of the world economy after the worst recession since the Great Depression. Under the new normal, the U.S. looks like they are loaded with slow growth and high unemployment for years in their struggle to overcome the consequences of the crisis.

'Unconventional' Strategies

responsible for U.S. policy are reacting to the new normal by applying "increasingly unconventional" strategies to help the economy, El-Erian said. The Federal Reserve intends to purchase $ 600 billion of longer-term U.S. Treasury bonds mid-2011 to help stimulate growth. President Barack Obama has reached agreement with Republican lawmakers in a budget package that includes a cut of 120 billion dollars in payroll taxes.

"The New Normal is still here," said El-Erian, 52 years. "What politicians are doing is kick the can down the road, in response to the symptoms of the new normal, but still not changing the dynamics of the medium term."

While the U.S. economy is recovering - it expanded 3.2 percent in the third quarter last year - unemployment has remained close to a maximum of 26 years, reaching 9.8 percent in November from 9.6 percent in October .

Tax relief package

The main objective of the tax package cut between Obama and Republicans - to generate jobs long term - will only be possible if part of a broader political agenda, El-Erian, wrote in a commentary on December 08.

"We need a more significant boost to improve long-term competitiveness of the United States, which has threatened to delays in infrastructure improvements and education and a misallocation of resources," he wrote.

Europe is also struggling with the consequences of the new normal as the region has been hit with a sovereign debt crisis. Pimco expects the euro zone economy will grow 0.5 percent to 0.75 percent next year, El-Erian said. Headquarters in Washington, the IMF has forecast growth for the region of 1.9 percent this year.

"Europe is in a completely different track to the U.S.," said El-Erian. "We are trying to achieve sustainable growth, getting your economic house in order through fiscal austerity."

The problem is that some countries - Greece, among them - might not be able to achieve growth or fiscal or economic consolidation, he said.

ECB purchases

Europe to the debt crisis has led to bailouts of Greece and Ireland this year, EU leaders are discussing plans for a permanent financial support. The European Central Bank has increased the purchase of bonds of the most indebted countries in the region to avoid loss of market goes.

The ECB is "basically to provide liquidity support of a solvency issue," said El-Erian. "The question is whether the market is going to cooperate with that," he added. "If not, will restructuring public disorder in some peripheral countries and even economic contraction."