There's more economic pain coming as the SVB fallout is likely not contained, Mohamed El-Erian says

• More economic pain is coming as the SVB fallout is likely not contained, Mohamed El-Erian said.
• Though policymakers have quelled financial contagion, economic contagion is still a risk, he warned.

There's more economic pain coming because the fallout from the Silicon Valley Bank collapse is likely not contained, according to top economist Mohamed El-Erian.

In an op-ed for Bloomberg on Tuesday, El-Erian said that while policymakers limited contagion in the financial system with most deposits still in the US banking system, that doesn't account for the effect on the economy as banks getting influxes of deposits have different lending profiles.

"This economic contagion, which will play out over time, threatens to increase the challenges facing an economy that is dealing with inflation, a mishandled interest-rate hiking cycle, declines in personal savings, bouts of financial instability and a slowing global economy," El-Erian warned.

Other market commentators have also warned of more economic pain, as the outflow of deposits in recent weeks will make banks less willing to lend, leading to tighter credit conditions. That will naturally slow down economic activity, experts say, which has significantly raised the odds of recession.

That issue layers on top of the existing struggles the US economy is facing. El-Erian has warned for months of the dangers of high inflation.

And though the Fed has raised interest rates aggressively to control inflation, it's now under pressure to lower rates to quell banking volatility, meaning the US is facing a trilemma of fighting inflation, avoiding recession, and regaining financial stability, he said.

"What is happening now is a reminder to financial companies, regulators, and supervisors that the effects of banking accidents are unlikely to be contained to the banking sector. It is also a reminder to markets not to allow the understandable focus on supersonic-speed financial contagion divert all the attention away from slower-moving economic contagion," El-Erian warned.

Though El-Erian has said a recession isn't inevitable, other commentators have warned that a downturn is more likely.

Goldman Sachs raised its prediction for a recession this year from a 25% probability to 35%, and legendary investor Jeremy Grantham predicted a painful recession that could cause stocks to plunge 50%.