(Bloomberg) -- Bad news about markets may set the stage for an economic slowdown that will require political will to head off, according to Mohamed El-Erian, chief economic adviser to Allianz SE.

“We may end up in a situation where people read these alarmist headlines, they get concerned, they stop spending,” El-Erian, who is also a Bloomberg Opinion columnist, said in a Bloomberg Radio interview. “As they stop spending, companies stop investing. And then we get a major slowdown.”

U.S. stock markets fell about 3% Wednesday as the bond yield curve inverted, historically a reliable indicator of an oncoming recession.

El-Erian also said:

  • Markets “are craving” better fundamentals in Europe, which may be closest to a recession, as well as in China and the U.S.
  • Pro-growth government policies, not just lower interest rates, are needed to restore market confidence. “It is not an engineering problem as much as it is a political one,” he said.
  • The U.S.-China trade war stems from genuine complaints about fairness and is likely to continue. “I don’t see China making the needed concessions,” he said. “Neither do I see the U.S. relaxing its demands. So the best I see is a cease-fire for a few weeks, a few months.”

--With assistance from Kevin Cirilli.

To contact the reporter on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net

To contact the editors responsible for this story: Alan Mirabella at amirabella@bloomberg.net, Josh Friedman, Dan Reichl

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