The global economy will likely remain resistant to a slowdown in U.S. growth as global imbalances begin unwinding next year, but the rebalancing won’t be without risks and limits, which will need to be monitored, according a report published by Merrill Lynch today.
Additionally, Merrill Lynch is also predicting that sovereign wealth funds will continue to gain importance.
“Imbalances in the economy, stemming from historic dependence on the U.S. consumer, have peaked and will unwind throughout the coming year,” Merrill Lynch economists and strategists wrote in the report. “At the heart of this rebalancing, which could last several years, is the growing power of consumers outside the U.S.”
As a result of this rebalancing, export-oriented U.S. companies and non-U.S. companies focused on their domestic markets will likely outperform. Risks include the possibility of a U.S. dollar crisis, as well as inflation.
Sovereign funds, which have been gaining in importance, as evidenced by the recent $7.5 billion investment by Abu Dhabi Investment Authority in Citigroup, will continue to increase their role in boosting global liquidity. Merrill Lynch analysts expect such funds to double or triple their share of the riskier global assets by 2010 and grow to a potential $8 trillion by 2011.
Regarding the U.S. economy, Merrill Lynch economists expect modest growth to take hold in late 2008, but said the Federal Reserve will need to cut interest rates to 2% by mid-2009 to sustain the recovery.
“The U.S. is on the precipice of its first consumer recession since 1991, which was the last time the market suffered from a confluence of high energy prices, weakening employment conditions, real estate deflation and tightening credit,” David Rosenberg, Merrill Lynch chief North American economist, wrote in the report.
U.S. economic growth is expected to slow to 1.4% from 2.2%. Not counting the U.S., global economic growth is expected to slip to 5.6% next year from 6.0% this year, according to Merrill economists.
Growth is expected to slow in Europe but should remain solid in 2008, while growth in emerging countries will be strong in 2008 but with large variations from country to country. The risk of inflation will exist throughout Europe, the Middle East and Africa and could prompt revaluations of certain currencies, financialweek.com reports.
The US is heading for recession next year, but the rest of the global economy will remain resilient to the US slowdown as global rebalancing remains an overriding theme, Merrill Lynch said.
Merrill's report on 'The Global Macro Year Ahead' for 2008 forecasts US annual GDP growth to slow to 1.4 pct from 2.2 pct in 2007, while global growth remains solid at 5.6 pct, down from 6.0 pct.
'The US is on the precipice of its first consumer recession since 1991, which was the last time the market suffered from a confluence of high energy prices, weakening employment conditions, real estate deflation and tightening credit,' said David Rosenberg, Merrill Lynch chief North American economist.
He said the economy faces a number of headwinds, including the accelerating slowdown in the US housing market, tighter lending rates, a deterioration in levels of employment and 'punishingly high' energy prices.
Merrill expects modest growth to take hold in the US by late 2008, but the Federal Reserve will need to cut interest rates to 2 pct by mid 2009 to sustain the recovery.
The euro zone, however, should be well-placed to weather the headwinds facing it. Although growth will be impeded by the strong euro, high oil prices and the credit turmoil, it will 'remain solid' in 2008.
'Strong fundamentals, including an absence of imbalances, and supportive monetary and fiscal policies underpin the region's strength'.
This will mean the European Central Bank is likely to keep interest rates on hold at 4.0 pct, although there are substantial upside risks to inflation in the region.
Euro zone growth is expected to slow to 2.1 pct in 2008 from 2.6 pct in 2007, Merrill forecast, while growth in Asia Pacific will also remain strong and little impacted by the US slowdown.
Growth in the UK, however, is expected to slow a lot sharper, to 2.1 pct in 2008 from 3.1 pct in 2007, as tighter credit conditions for both households and businesses 'add further restraint' to the 125 basis points of interest rate hikes between autumn 2006 and summer 2007.
To counteract this, Merrill expects the Bank of England to cut interest rates by 75 basis points by the middle of next year, starting with a 25 basis point cut at its meeting on Thursday, thomsonfxhub.com reports.