The global phenomenon of a decoupling between the economies of the U.S. and the rest of the world is becoming more pronounced and is set to last, according to Merrill Lynch’s (NYSE: MER) mid-year 2007 global economics report, “Global Decoupling: A Marathon, Not A Sprint.” First presented to investors in a Merrill Lynch report in 2006, the firm’s economists expand on how decoupling is unfolding, with three new calls. The Merrill Lynch global economics team believes that:
First, the global economy will continue to grow in 2007 – with no sign of a significant cyclical slowdown. The bank’s economists are more bearish than most on the prospects for the U.S. economy, but are more bullish than consensus about the rest of the world.
Second, decoupling is not simply a cyclical trend. Structural forces, such as a sustained investment spending boom outside the U.S., are driving this global economic force – giving it longevity.
Third, inflation poses the biggest risk to global growth and the threat it poses is higher than the market is currently anticipating. Merrill Lynch forecasts non-U.S. inflation to rise to 3.4% in 2008 from 3.2% in 2007.
Additional highlights from the report include:
Rest of the world takes up the baton
“If anything, our bullish call on global growth last September was not bullish enough,” said Alex Patelis, Head of International Economics at Merrill Lynch. “Looking into the balance of 2007 our view stands intact: this is a year of transition as the U.S. passes the global growth baton to the rest of the world.”
Consumer is key for U.S.
Merrill Lynch’s view on decoupling reflects how the U.S. economy has shifted to a lower gear. David Rosenberg, Chief North America Economist, believes that the power of the consumer is key to the U.S. economy and he highlights signs that consumer spending could weaken. For example, higher oil and gas prices and higher grocery prices could trim discretionary spending.
Asia shows resilience
The Asian economy is displaying resilience. GDP in the region is growing strongly despite a slowdown in exports to the U.S., thanks in part to higher exports to Europe and other parts of the world. Furthermore, Asian domestic demand is gathering momentum. TJ Bond, Chief Asia Economist, believes that a U.S. slowdown - and even a modest U.S. recession - would have a modest impact on Asian growth.
Fiscal policy boosts Europe
Klaus Baader, Chief Europe Economist, says that prospects for the Eurozone and other European economies continue to brighten. He notes that Europe’s trade performance has been ahead of expectations and the region has withstood tighter fiscal policies, and governments will be under decreasing pressure to raise taxes as spending deficits fall.
Japan poised for comeback
The Japanese economy is set to make a comeback after six slow months. Consumer demand will recover after the sharp rise in savings rates seen in 2006. Merrill Lynch believes that higher productivity should fuel a rise in corporate profits. Pragmatic monetary and fiscal policies will help the economy.
Canada could yet survive U.S. slowdown
Merrill Lynch also believes that Canada may struggle to boom economically in the face of a U.S. slowdown, but that prospects are encouraging after weak growth in 2006. Domestic demand and manufacturing have been driving a pick-up in first half growth.
Emerging Markets remain well positioned
EMEA (Emerging Europe, Middle-East and Africa) appears well-positioned to weather a U.S. slowdown, thanks in part to continued high commodity prices and strong demand for exports. Latin America is on track to post a fifth straight year of solid economic growth and is grappling with how to ensure that positive effects of the favorable global environment reach the poorest members of its population.
Commodity super-cycle lives on
Dry bulk shipping prices point to the health of commodities markets, and it is clear that demand for bulk commodities such as iron ore, coal and grains is outpacing growth in shipping capacity. A tripling in dry bulk shipping prices since the start of 2006 suggests that the commodity super-cycle remains in place.
U.S. dollar faces further weakening
Merrill Lynch expects the dollar to weaken modestly in the second half of 2007 against the euro and the yen. Investment levels in U.S. assets could fall with the global savings rate at historical highs and savers looking more towards non-U.S. assets, but central banks will continue to support the dollar.
Merrill Lynch Global Securities Research & Economics Group has consistently achieved high rankings for its equity and fixed income research in numerous regional and global investor surveys, such as Institutional Investor, The Wall Street Journal, LatinFinance, Asiamoney, Euromoney, Extel and Reuters.
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