A new report by Merrill Lynch Global Research expects the global economy to remain resistant to a slowdown in US growth.
However, Merrill Lynch economists and strategists believe that whereas 2007 was a year of continuing trends, 2008 will likely be a year of economic inflection points with the rate of Gross Domestic Product growth rapidly changing in many countries.
In the report “2008: The Global Macro Year Ahead,” Merrill Lynch identifies the following three significant cross-regional themes for 2008: Global imbalances are unwinding; There are risks and limits arising from decoupling that need to be monitored; Investment in sovereign wealth funds continues to grow.
The rebalancing of the global economy is one of three main calls for 2008 from Merrill Lynch. Imbalances in the global economy, stemming from historic dependence on the US consumer, have peaked and will unwind throughout the coming year, conclude Merrill Lynch’s economists and strategists.
This “rebalances” the growth within countries. At the heart of this rebalancing, which could last several years, is the growing power of consumers outside the US and the prospect of a consumer recession within it. High levels of personal debt are curtailing spending habits of US consumers, while prospects for domestic demand are strong outside the United States.
Merrill Lynch believes that rebalancing will be the dominant economic theme for the next three to five years. Rebalancing implies that investors should take overweight positions on export-oriented companies in the United States and domestically-oriented companies elsewhere. Also contributing to the rebalancing is the continued weakness of the dollar. Merrill Lynch’s trading conditions will favor two groups: US corporations focusing on exports, and non-US companies focusing on their domestic markets.
Secondly, Merrill Lynch argues that investors should monitor risks and limits rising from the continued trend of the US and world economies decoupling. While many investors are asking whether a severe US downturn could prompt a world slowdown, Merrill Lynch focuses on the opposite: which risks might arise from the continued boom in the rest of the world relative to the United States?
The report notes that these risks include the possibility of a US dollar crisis, inflation or the negative side-effects of inflation. Although these issues could emerge in specific countries in 2008, Merrill Lynch does not think they will be binding for the global economy as a whole.
Finally, Merrill Lynch believes that sovereign wealth funds, boosted by rapidly growing central bank reserves, will play an important role in boosting global liquidity. Merrill Lynch expects sovereign wealth funds to double or triple their share of riskier global assets by 2010, and grow to a potential $8 trillion by 2011.