our top story — officials in london and brussels have finalised a draft agreement on brexit. with just four months to go before the uk leaves the european union, ministers were called to downing street to read the draft deal. there's no guarantee it will be approved by the uk parliament or by the other 27 eu member countries. around 100 people are still missing in california after the worst wildfires in the state's history. 44 people are now known to have died. more than seven thousand homes and other buildings have been destroyed. and this story is trending on bbc.com. a man has been taken into custody after a police appealfor a ross from friends lookalike went viral. the image of the suspected thief was taken in blackpool in the north—west of england. that's all. now on bbc news, it's time for hardtalk. welcome to hardtalk,

i'm sarah montague. the american economy is booming. growth is currently well above 3%, and unemployment is near a 50—year low. president trump says it's the best it has ever been and has taken the credit for that. but he is threatening a trade war with china at a time when many economists are warning that the us and the world face another recession. my guest, mohamed el—erian, is chief economic adviser at the insurance giant, allianz. does he see dark days ahead for the american, and therefore the world's economy? mohamed el—erian, welcome to hardtalk.

thank you for having me on. now, president trump tweets, "this is the greatest economy in the history of america." do you think the president has been good for the american economy? i think he's right in saying the economy is in a good place. it's not often you get three engines all revving up at the same time, and that's what's happening. consumption based on a strong labour market, business investment based on strong corporate sentiment, and, on top of that, you're getting fiscal spending kicking in as well. yes, the us economy is in a good place. yes, he's made an impact, but what he's done is built on the momentum that was achieved also under barack obama. ok, so the graph, straight—line, continued, but he's done things that have helped the economy? he's done two things in particular

that have helped the economy. one is deregulation, and business has really bought into deregulation, and that explains why the willingness to invest has gone up. it's never been about ability, companies had a lot of cash, it's been about willingness. the second thing he's done, and economists disagree on how efficient it was, how fair it was, but economists agree that tax cuts will bring a boost to growth that will last a good two years, if not three. 0k, a year or so ago, you said there was a 50% chance of another recession in the next two years. a year on from that, what would you put the probability at? ironically it depends on where you're looking in the world, the most important theme for the global economy today is divergence. most of the time advanced economies are correlated, they go up at the same time, they slow down. today we're seeing something very peculiar. the us is accelerating, while europe is slowing down. so you're seeing a gap evolve. you see two interesting questions,

what happens during the divergence? secondly, ultimately, how does the convergence proceed? is the us pulled down by the gravity of the rest of the world, or does europe get its act together and draw in the us? is the probability 50% for europe next year? yes. for the us? no. how will it combine? it's tricky. so for europe, next year, the chance of a recession are, what, 50%? yes, because they are not undertaking the fundamental handoff, which is what economists call from cyclical growth to secular growth. so think of a patient that ended up in intensive care, that's where the eurozone was in 2012, 2013, 2014, major questions about whether they would even survive. came out of intensive care, ended up in the hospital room and now it is out and the initial reaction is wow, the patient can now walk and you've got a lot of confidence europe was picking up. but when the patient was structurally impaired, which is what the eurozone is today, it can't sustain its walk

for a long time. you've used a different metaphor, you talked about a t—junction. correct. you've said one road leads to higher growth and a more inclusive form of capitalism, the other turns to recession, instability and turmoil. what do you mean by that inclusive form of capitalism? it means that most of the people in the economy feel that they are sharing the fruits of economic expansion. one of the tragedies of the last few years coming out of the global financial crisis was not only was growth too low, but the benefits of that growth went to a very small segment of the population, who happened to be the better off. are you just talking about europe here?

and the united states. the reason why there's so much anger and division in the united states is there's a feeling, rightly so, that wages haven't moved, even though the economy has boomed, markets have boomed, wages have been very sluggish until recently. unemployment in the united states is very low, so the idea of opportunity is there? it's interesting certainly the opportunity is there. let me give you very striking numbers. there's 4.9 million job openings. there's 4.1 million unemployed. so clearly there's opportunities there, but there's a problem of mobility, there's a problem of skill mismatch. so the feeling among people is that they don't have the same

opportunity as before. the us society is very interesting, it will tolerate a lot of inequality of income and wealth. in fact, it views income and wealth inequality as being an advantage. yes, if you create facebook, you should be a billionaire, but the moment you bring the third issue in, inequality of opportunity, then people get angry. you think that's driving the politics? absolutely, absolutely. so what is the remedy for that? first is to understand that we need to take much more seriously this issue of inclusiveness, which, to be honest, hasn't really sunk in enough. secondly is to bring people into the economy. the labour participation rate, meaning people who have exited the labour force because they're totally discouraged, is still at multi—decade highs, and that's a real problem for society, it's a real problem for the economy, so there are measures you can do, infrastructure being an example. companies taking responsibility more seriously about labour retooling and retraining is another example. this is a prescription that could apply in all developed countries? correct, because there are three things that are really creating

anxiety among people. technology, and "will technology displace me or not?" two is trust. people have lost trust in governments. people have lost trust in expert opinion, in institutions. and third is trade, "am i going to be displaced by somebody else?" and one of the ways you're suggesting that this could be addressed is by, what, a massive spend, borrowing to spend, to invest in infrastructure? there's three ways it can be addressed. one is through structural reforms. increase people's access to proper education, to proper training. help them develop their skills. develop the infrastructure to allow for more activity. so there's a whole set of what i call structural reforms. secondly, for certain countries, germany being an example, a more active use of fiscal policy.

there's countries where there is room to use fiscal policy. by that you mean they can afford to spend some of their wealth, other countries are more indebted, germany is not? correct. not just they can, they should. just germany? so germany was an example. the us, to a certain extent, was an example under president 0bama, but congress was completely divided. the us went six years without a budget approval process. ok, so despite the fact that people would see the united states as hugely indebted, you would say that's necessary and fine. why do you worry about debt? whether you're a company, country or individual, is debt sustainability. can you afford your debt? think of it as a fraction. the numerator is what we all focus on, debt, but the denominator, growth, how much income we generate is as important as the numerator. if you can use debt to increase your potential,

infrastructure being an example, at these very low interest rates, that's a good trade. infrastructure, you mention, in the united states, this is one area that after the mid—terms, despite all the division between the political parties, both are talking about working on infrastructure. do you think it's something where democrats and republicans can get some sort of deal? in theory, yes. in fact, they're talking about something very similar. it was also talked about under president obama. in practice, let me ask you a question, will the democrats be willing to do something that will promote economic growth right into the next election? that's the political calculus. it stopped the previous congress from approving it for president 0bama, and it may stop this congress approving it under president trump. the way you frame that question, the onus is on the democrats? correct, because they want to

recapture the white house come 2020. and they know if the economy continues to boom, that could be a factor in people's thinking when they come to vote. 0k. now, one of the things president trump credit him with doing a considerable amount for the economy, what he is also, though, done, is slapped huge tariffs on chinese goods, $250 billion, and threatening another $267 billion. your assessment of the potential damage is not that great, that actually to hear your argument is that there's a logic in some sense behind this. ironically i think the administration has stumbled into something that's notjust logical, but is going to work. let me explain why. i don't think anybody denies that we have problems. intellectual property

theft is a problem. forcing companies to take on partners and joint ventures, and seeing technology transferred is a problem. in the past, the approach to trade, which is inherently cooperative... if you and i trade, it's because both of us see an advantage, ..was let's entice the other side to act fairly. economists have this thing called game theory when you look at two people negotiate. trade when you think it in game theory terms is a cooperative game. along comes president trump end he says, "you know what, this character approach doesn't work. i'm going to use the stick. i'm going to turn trade into an uncooperative game." so everybody‘s shocked, and rightly so, i was shocked initially. the reaction is the other side says, "if you're going to slap tariffs on me, i'm going to slap tariffs on you."

then the us stumbles into what i call the reagan moment, it goes back to what reagan did in the 19805 with the soviet union when he embarked on a massive military buildup. the us realised it's willing to incur the costs and risks of a trade war, because there are costs and risks, it will win every single time. what you've seen is country after country, starting with korea, then mexico, then canada and now the eu is in the process, realise the right approach is not to stick with that, the right approach is to diffuse the tensions. ok, the comparison with reagan is ultimately there was disarmament because the soviet union couldn't compete. here you're saying the united states is going to win any trade war, so every other country is going to recognise that at some point and cut a better deal? i think so, and i would be wrong on three counts, especially with china. one is they're not able to save face domesticly, so they continue with the tit—for—tat for too long.

two is in the us, the trade issue goes from being a trade issue to being a national security issue. people say, "wow, it's notjust about getting better trade terms, we can contain china," and once it becomes a national security issue, it will become harder to solve. finally, china has a tendency to say, "we play the long game. president trump will be there maximum six years, we can wait." that would be a mistake. and what they've said about the us approach is that it's trade bullying practices, intimidating other countries through economic measures and accused the us of starting the largest trade war in economic history. you're saying all those may be true... up to the last point, because we've had bigger trade wars, it's true. the us has decided to push other countries around on trade. yes, it is true.

and yet you say, from the various outcomes that you would expect, i think it's 75% of your outcomes are beneficial to the united states, only a quarter... correct. one in four is there a chance of a trade war, but we have the former us trade secretary, hank paulson, talking about "economic tensions as a result of this reaching a breaking point, could tip into a full—blown cold war. i now see the prospect of a full—blown economic iron curtain, one that throws up walls on each side, an un—makes the global economy." and that is the 25% risk. that's why most people would say don't embark on this strategy because 25% probability of something really bad... if i tell you there's a 25% probability that, god forbid, on your drive home tonight, you will have a massive crash. you say ok, it may be a small probability but it's a huge event. i always ask when people say that, "i agree with you, but what probability do

you attach to that?" so therefore their meeting, the next meeting in argentina, which is at the end of this month, is significant, when the us and chinese leaders meet. not just significant, critical. and if the chinese are able to come to the table with three things, we could have a good outcome. the three things being? 0ne — some measures, especially on energy, to reduce the bilateral trade deficit, because that's something that president trump really cares about. two — relaxing joint—venture requirements. no longer requiring us companies to take on a local partner. these two things are relatively easy. the third one is a tricky one, and it requires a lot of thinking — how to convince the us of a verifiable plan to reduce intellectual property theft. if china can deliver on these three things, i expect we're going to have a breakthrough. 0k, well, breakthrough or not, there are separate concerns

increasingly raised about the prospect of recession in the united states. now, you make the point — already made the point that the united states is in a different place. its economy doing incredibly well. but you have said that there was a 50—50 chance of another recession as far as eu is concerned, europe is concerned. what would it be in the united states? it would be a lot lower. you only get a recession in the us if one of two things happen. if the fed, the central bank, makes a major policy mistake — possible, but unlikely. and two — if the rest of the world goes into such a big recession that it drags down the us. you know, you can't be a good house in a bad neighbourhood. always remember that. so, no matter how good your house is, if the neighbourhood deteriorates really badly... 0k, well, let's talk about the neighbourhood, and it's a global neighbourhood. correct. but this is as a result

of the global financial crisis in 2008. we had quantitive easing around the world, vast sums of money, and there is concern about what happened to them, the risk that countries took on with that extra cash. is that in danger of not only pulling emerging market economies down, but also other developed economies? it certainly is a big issue for major markets, because what happens is, when you flood the system with liquidity, people go and search for opportunities in a much more aggressive way. where do they go? they go to places they don't understand well that, on paper, offer high returns — mostly emerging markets. these countries get flooded with capital. 0ften it's used inefficiently, and then the investor changes her or his mind and pulls out, and these countries than face a major contraction. now, it's important, it's not about the banks

this time around. so this is not about the global system being at risk, like 2008, but it's particular countries and companies that have overborrowed, in particular, investors that have ta ken excessive risk. so it is an issue, and it's not on the radar screens of enough people, because it's the non—bank sector, and people tend to worry less about the non—bank sector. but it is critical, then, what the us federal reserve does, because you're talking about debts that are denominated in dollars, and you're talking about a federal reserve which is in the process, because of what's going on in the united states, of raising interest rates. correct, and if you talk to federal reserve officials, they will say i hear you, but it's not my problem. countries must address it. and you say, well, it is your problem, because this is the spillover effects of what you are doing. and they say, well, we have a domestic mandate. 0ur mandate talks about conditions in the us.

and then you tell them, well, when do you start worrying? and they say the famous word, spillbacks. when the spillover spills back, that's when they're going to worry. that's why other countries been complaining, but with no effect. ok, but we've also heard the former chair of the federal reserve, ben bernanke, talking about what's happening in the united states as a result of the huge stimulus, $1.5 trillion in tax cuts, $3.5 trillion in easing. and he makes the point the stimulus is going to affect the economy in a big way this year, and in 2020, so we're talking about the year after next. wile e coyote — that is the roadrunner cartoon that many people know, is going to go off the cliff. and you can imagine that picture of the roadrunner heading off the cliff, and it's not a pretty picture. he's talking about the us economy. he is. is he wrong? so he's right in saying that the timing could have been

a lot better. this fiscal stimulus should have come a lot earlier. and in fact, it was proposed over and over again, but if you recall, congress was taking almost no action, because it was so split. the tea party had emerged... sure, but what damage will it do now? so his point is that the reason why you get this coyote moment is because this is a sugar high, right? that the fiscal expansion makes everybody all excited, et cetera, like feeding your baby a lot of sugar, and then there's that awful moment afterwards. he is right, if potential growth doesn't go up. so the big bet that the trump administration is making is that, by encouraging companies to spend more, to invest more, by encouraging people to re—enter the labour force, they will increase the productive capacity of the economy. that is the bet — essentially that is the bet. is it a big bet? it's a huge bet. it's not a stupid bet, it actually makes sense, but you've got to make sure that you get a handoff to secular growth. when we're talking about shocks

to the system, the uk is about to potentially go through one — brexit, of course. there is the prospect of a no—deal brexit, that a deal cannot be reached in time with the eu before the uk leaves. how damaging would that be? so a hard brexit would make both the journey and the destination to whatever new relationship the uk has a lot harder, 0k? you remember, you know, a simple thing — you cannot replace something with nothing. a hard brexit tomorrow or in march would have enormous difficulty, because you haven't put the replacement infrastructure in place yet. so the uk, in my mind, would go into recession. now, some people will tell you, you know what? that's cleansing. maybe we need a recession to get our act together on all these other issues. if the uk leaves the eu without a deal, it will go into recession?

yes. how quickly? pretty quickly, pretty quickly. which means what? within three to four months. really? absolutely. and i don't think we're going to get a hard brexit. i think, when push comes to shove, we're going to get another 12—month extension agreed to. because from the eu side... the uk will not leave? it will not be the cliff effect — that if the conservative party cannot agree on proposals, or if they can agree, but they cannot convince the eu, if there is some issue that stops an agreement for a transitional phase, then people are going to say, you know what? let's extend the deadline. so those who say, look, just trade under wto rules, this is a lot of fuss being made... they don't quite understand the infrastructure. the pipes, over decades, have been built on the basis of a free trade area with europe. so when you say, suddenly trade under wto rules, you'll find you are missing

quite a few pipes. do you think the british people should be worried about the direction that is being pursued? i think, short—term, yes. i think, long—term, it's an open question. and i think a lot of people will be shocked by me saying that. but there was a fundamental problem from day one between the uk and europe. for europe, this whole integration issue is beyond economics. it's a marriage, it's holistic — ever—closer union. for the uk, it was more like dating. let's have a free trade zone, but don't bring in all this other stuff. i don't want this ever—closer union, i just want a date. and long—term, these are two fundamentally different visions, so we were going to have a clash at some point. so if you can deal with thejourney, which is treaty, very tricky, the destination is mostly sustainable.

but you need to get there. mohamed el—erian, thank you for coming on hardtalk. thank you very much. hello. after the heavy, blustery showers to start the week, tuesday delivered us sunshine. a good deal of it here on the north coast of yorkshire earlier on in the afternoon. a similar picture in perth and kinross as well. we already have some changes to the western side of the uk.

notice the squeeze in the isobars. outbreaks of rain across south—west england, wales, northern ireland, north—west england, and running up into scotland. bot just wet but windy as well. these black wind symbols are the strength of the gusts through wednesday morning. quite widely 40—50 mph for many coasts and heavy and persistent rain. particularly for southern and western scotland. warnings in place here. that rain will start to move away north and eastwards. we see something dry arriving in to northern ireland, north—west england, west wales. the rain may linger through the afternoon across northern parts of scotland. to the eastern side of scotland where we get some sunshine,

temperatures up to 15—16 celsius for all of us it is a mild day. also, it is dry. a mix of variable brain and clubs but could see a mixture developing. a little bit cooler were we keep cool skies. holding up to double figures were we keep the cloud. it is mile air which continues to flow across the uk is to go into thursday. —— milder air. fringing for the far north of scotla nd fringing for the far north of scotland and northern ireland. some may have a fairly loony day but where does in and break, we will see some good spells of sunshine and again, temperatures in the midteens. 13 to 16 celsius. looking ahead to the end of the week, we have an area of high pressure keeping things fairly settled and keeping funds in

the atlantic at a. heading through friday and into the weekend, both will be dry. however, with lighter winds, we are likely to seize on mist and fog and that may linger at times and temperatures just starting to slide away on saturday. the buyer. —— bay. —— goodbye. i'm kasia madera in london. the headlines: a draft agreement on brexit, but will it get through the british cabinet and parliament? utterly unacceptable to anybody who believes in democracy. the deadliest wildfires in california's history. 44 dead and thousands of homes destroyed. i'm rico hizon in singapore. also in the programme: china's premier says a code of conduct for the south china sea is three years away. the philippine defence secretary tells this programme he's baffled. and as part of our investigations into fake news,

we look at the particular problems in india, and how one of the bbc‘s language services is fighting back.