March CPI – Fed Finds Itself Between a Rock and a Hard Place

Saturday, April 16th, 2011

March Consumer Price Index – Fed Finds Itself Between a Rock and a Hard Place

The Consumer Price Index (CPI) rose 0.5% in March, following a similar increase in February.  The 3.5% increase of the energy price index and the 0.8% jump in food prices made up three quarters of the overall increase of the CPI in March.  On a year-to-year basis, the CPI has risen 2.7% in March, putting the three-month annualized gain at 6.1%.  The core CPI, which excludes food and energy rose 0.1% in March, which yields a three-month annualized increase of 2.0%.  The acceleration of these inflation measures in a short time period is noteworthy (see Chart 1).

Inflation measures are moving up consistent with the objective of the quantitative easing program in place. The goal was to nudge prices upward gradually in line with growth of the economy.  But, food and energy prices have shot up sharply in a short span of time while the pace of economic growth and employment gains remain significantly short of the Fed’s full employment mandate.  Immediate tightening of monetary policy to curtail inflation would setback economic activity.

In 2008, when oil prices rose sharply, the Fed was able to select economic growth in inflation-growth debate because a severe financial crisis was underway and the prospect of significantly weak economic conditions was becoming clear.  At the present time, the FOMC doves still have the upper hand and can cite a litany of evidence to make their case.  Although, the unemployment rate has declined to 8.8%, it is holding at an elevated level and real GDP is noticeably below the potential level (see Chart 2).  Under these circumstances, the Fed can continue to view food and energy prices as “transitory.”  But, the call will get more challenging if food and energy prices continue to climb and worrisome spillover signs emerge.

Inflation has once again emerged at the top of the worry list of central bankers.  The latest inflation reading (+2.7%) in the Euro area exceeds the policy target of 2.0%.  Latest inflation numbers from China (+5.4%) and India (+8.9%, wholesale prices) have raised expectations of another round of tightening of monetary policy conditions in the near term.

From the details of the US CPI report, the energy price index has moved up 23.1% since June 2010.  Among the components of the energy price index, gasoline (+5.6%), heating oil (+6.7%), and electricity (+0.7%) posted gains and natural gas prices declined 1.4%.  In addition to higher energy and food prices, prices of several other items also moved up during March.  Shelter costs (+0.1%), prices of new cars (+0.7%), used cars (+0.8%), airfares (+0.4%), and medical care (+0.2%) rose in March, while apparel prices fell 0.5% and recreation costs held steady.

Strong Showing of Factory Production in March and the First Quarter

Industrial production rose 0.8% during March, following more muted gains of 0.1% in each of the prior two months.  Factory production, which excludes output of the nation’s utilities and mining sector, advanced 0.7% in March, following impressive gains of 0.8% and 0.6% in January and February, respectively.  As a result of these strong monthly increases, factory production in the first quarter of 2011 moved up at an annual rate of 9.2%, the largest increase since 1997 (see Chart 4).

In March, auto production surged 2.9% and raised the annualized increase in auto production to nearly 30% in the first quarter of 2011.  High-tech production was another component showing strong growth in March (+0.9%) and in the first quarter (+38.8%, annualized).  Excluding autos and high-tech, factory production rose 0.5%, which puts the first quarter annualized gain at 5.6% (see Chart 5).

The operating rate of the nation’s industries increased to 77.4% in March from 76.9% during February, while factory sector’s capacity utilization rate increased to 75.3% from 74.9% in the same period.  The long-term average of the operating rate for the factory sector is 80.6%.  Effectively, there is still sufficient excess capacity in the factory sector if demand gathers steam.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

Copyright © Northern Trust

Tags: China, Consumer Price Index, Core Cpi, Economic Activity, Employment Gains, Energy Price, Energy Prices, Food prices, Full Employment, Growth Debate, Index Cpi, India, Inflation Measures, Litany, March Cpi, Northern Trust, oil, Oil Prices, Real Gdp, Rock And A Hard Place, Spillover, Three Quarters, Unemployment Rate
Posted in Energy & Natural Resources, India, Markets, Oil and Gas | Comments Off

Economy and Bond Market (November 15, 2010)

Sunday, November 14th, 2010

The Economy and Bond Market (November 15, 2010)

Economic news flow was relatively light after an action-packed week last week. The market continued to digest the implications of quantitative easing (QE2), the mid-term elections and employment data. Bonds sold off this week, sending yields higher by as much as 25 basis points on a combination of QE2 trade unwind and speculation that troubled European lenders will be supported by the rest of the Euro region. The stress and concerns surrounding peripheral European countries can be seen in the chart below, which shows the current Irish 10-year bond price, which currently yields about 8 percent.

Strengths

• Mortgage rates fell to a record low of 4.17 percent.
• Consumer debt continued to decline in the third quarter as necessary deleveraging is taking place.
• The University of Michigan Confidence Index rose modestly in November.

Weaknesses

• Soaring Irish bond yields highlight the remaining risks and concerns surrounding the Euro region.
• China raised its bank reserve ratio as it steps up efforts to slow inflation and to offset some of the spillover from the U.S. QE2 program.
• Wholesale inventories rose 1.5 percent in September, matching the largest increase in two years. This is a potential red flag for manufacturing, as the restocking process is likely completed and this data points to slowing sales.

Opportunities

• Inflation is unlikely to be a problem for some time, giving central bankers and other policy makers around the world room for expansive policies.

Threats

• Inflation expectations as measured by TIPS spreads have risen sharply over the past month. Inflation expectations will be key data points to drive Fed policy changes going forward.

Tags: 10 Year Treasury, Basis Points, Bond Market, Bond Price, Bond Yields, China, Confidence Index, Consumer Debt, Employment Data, Fed Policy Changes, Inflation Expectations, Key Data, Mid Term Elections, Mortgage Rates, Qe2, Red Flag, Reserve Ratio, Sales Opportunities, Spillover, University Of Michigan Confidence, Wholesale Inventories
Posted in China, Markets | Comments Off

The Oil Industry in a Post-BP World (Fred Sturm)

Monday, June 28th, 2010

Fred Sturm, Executive Vice President & Chief Investment Strategist, Mackenzie Investments discusses implications of the Gulf oil spill.

Source: ClientInsights.ca

Transcript

Interview with Fred Sturm, Chief Investment Strategist, and portfolio manager of $9-billion in Resources Funds at Mackenzie Financial, among the largest mandates of this kind in the world.

DR: Fred, We’re going to talk today about the impact of the difficulties that BP has run into in the Gulf of Mexico; Prior to this incident, the Obama administration had approved the expansion of offshore drilling in the Gulf of Mexico, and of course that’s now been suspended.

In your view how big an impact is the suspension of drilling in terms of the supply demand balance for oil?

FS: In our view, not that material in the short instance. The US consumes 20% of the world’s oil, it has only a handful of percent of the world’s reserves, so the production base in America at 5.5 million barrels out of 85-million barrels is not that large.

The impact is more the ongoing spillover of challenge to develop the offshore. The world simply needs more offshore development. There is insufficient oil in our time horizon already, coming forward, to satisfy what the world would want to and need to consume.

DR: And, whenever something like BP happens there are inevitably going to be winners and losers; Aside from BP, who would you pinpoint as the losers as of this event?

FS: Losers will be the smaller companies that were hoping to develop one well here or there, because the big companies like BP and Exxon, have been self insuring in a sense of taking on this risk uninsured. If you are a smaller company, its very difficult to justify risking your entire company on one prospective well. It will progressively become a big boys game, rather than for smaller companies.

We expect this trend to bigger broader base to continue.

DR: So smaller exploration companies (will lose), and on the winner’s side, larger companies. What about the oil sands sector? Is that going to be a winner coming out of this. Onshore oil production growth, reliable growth, containable identifiable environmental footprint and impact; those are all clear winners for us.

I think it does cast the Canadian tar sands in a much more favourable light. The other, perhaps less obvious, is the service companies because what is clear is that the integrated companies will want the best equipment. Too much exposure to risk using older equipment.

We think that coming out of this total expenditure on servicing will go up, not down.

DR: I want to close by talking briefly about BP. Can we start by quickly talking about what’s happened to the total value of BP’s shares since this incident?

FS: Yeah, amazingly this company has been cut into half – here we’re talking about a hundred-billion dollars of market cap – far in excess of what any perceived environmental disaster might be.

DR: Fred, BPs off 50%; is there a price at which you’d find BP attractive?

FS: Its awfully tempting from a valuation perspective, to become an investor in the BP shares at current levels. Our valuation suggests that they are underpriced at current juncture. As an investor in the equity markets we have to balance the realization of value, and the timing of that realization against a dynamic.

We suspect that every person that thought they were going to rent a house out anywhere near the beach is going to claim this environmental disaster has impacted their business. So there will be some very honourable claims. There will be some that will be less clear, which are not going to be argued out for another decade.

DR: Last question; Are there any longer term lessons that you would draw from the BP experience here for money managers and investors?

I think it comes back to the discussion around diversification. In all the best research that we can do, in all the best valuation work that we can do random things happen, accidents happen, and the whole process of diversification tries to address that. Diversification by industry subsector, diversification by geography, company profile I think is very important. That’s probably the single most important message.

DR: Fred, thank you very much.

Tags: Big Boys, Bp, Canadian Market, Chief Investment Strategist, Demand Balance, Dr Fred, Entire Company, Executive Vice, Exploration Companies, Fred Sturm, Gulf Of Mexico, Gulf Oil, Investments, Mackenzie, Mackenzie Financial, Offshore Development, Offshore Drilling, Oil Industry, Oil Sands, Oil Spill, Portfolio Manager, Smaller Companies, Smaller Company, Spillover, Time Horizon, Vice President, Winners And Losers
Posted in Energy & Natural Resources, Markets, Oil and Gas | Comments Off

TD Economics: Bank of Canada Embarks on the Upward Climb

Tuesday, June 1st, 2010

This comment is a guest contribution by Grant Bishop, Economist, TD Economics.

June 1, 2010

Data Release: BANK OF CANADA EMBARKS ON THE UPWARD CLIMB [PDF Download]

• The Bank of Canada commenced tightening of monetary policy with a 25 basis point hike, increasing the overnight target rate to 0.50%. This move was widely expected given the strong Q1/2010 GDP performance and acceleration in core CPI. Having taken the overnight target rate off its lower bound, the Bank also normalized the operating band, reestablishing its deposit rate and lending (the “Bank Rate”) at 25 basis points below and above the target, respectively.
• The text of the announcement highlighted Canada’s strong performance, observing the robust first quarter growth and resumption of employment growth. It pointed to the strength of domestic demand through the housing and consumer spending.
• However, the Bank stressed that household expenditures will necessarily moderate to pace more in-line with income growth, reducing the contribution from consumption and residential construction in the coming quarters. Moreover, the Bank observed that business investment still has yet to take the baton, noting that “the anticipated pick-up in business investment will be important for a more balanced recovery”
• The statement was also keenly attentive to the international setting and its downside risks. Although the volatility from sovereign debt fears has somewhat subsided in the past weeks, the Bank notes that that the Eurozone tensions will likely prompt increased borrowing costs and more rapid fiscal consolidation for some countries. While the Bank observes that spillover to Canada has so far been modest and limited to commodity prices and some heightened financial stress, it observes that the “broad forces of household, bank and sovereign will add to the variability, and temper the pace, of global growth.”
• Looking ahead, anticipating a moderating clip for domestic demand and bearing the recent global volatility in mind, the Bank stressed the “considerable uncertainty surround the outlook” and stated that “any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.”

Key Implications

• Remembering that monetary policy only impacts with a lag, the exceptional near-term performance of the Canadian economy and stickiness in core inflation point to a necessary tightening to begin to restrain price growth. The Bank of Canada has the sole mandate of achieving its 2% inflation target and conducts its policy through that exclusive prism.
• Although the near-term economic strength will ebb, the uptake of slack and rebound in price growth meant it was due time to take interest rates off their emergency level at the effective lower bound. Nonetheless, today’s 25 basis point increase represents a modest tightening and still leaves rates at very accommodative levels.
• The decision does mean that a rebalancing of monetary policy has commenced and interest rates will be lifted as economic slack is absorbed to restrain price growth. Nonetheless, the wording of the announcement indicates that in undertaking subsequent rate hikes the Bank will remain very attentive to the likely moderation in domestic demand and developments in the global financial system.
• While the Bank took the “elevator down” when cleaving rates, ongoing uncertainties and an easing pace of growth point to a very careful pace of tightening. The Bank may not hike at each meeting and might “pause” on increases if near-term financial conditions warrant. The emphasis on global conditions in today’s communiqué is no accident and, after the rocky last couple of years, policy-makers are keenly aware that Canada is not an island.
• Barring unforeseen shocks in global financial markets, based on our outlook for economic growth and inflation, we anticipate a sequence of 25 basis point increases at subsequent announcements, with the overnight rate at a still-stimulative 1.50% by year’s end.

Grant Bishop, Economist
416-982-8063

DISCLAIMER

This report is provided by TD Economics for customers of TD Bank Financial Group. It is for information purposes only and may not be appropriate for other purposes. The report does not provide material information about the business and affairs of TD Bank Financial Group and the members of TD Economics are not spokespersons for TD Bank Financial Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. The report contains economic analysis and views, including about future economic and fi nancial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affi liates and related entities that comprise TD Bank Financial Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

Tags: Bank Of Canada, Basis Point, Basis Points, Canadian Market, Commodity Prices, Consumer Spending, Core Cpi, Downside Risks, Employment Growth, Financial Stress, Fiscal Consolidation, Global Growth, Household Bank, Household Expenditures, Lower Bound, Quarter Growth, Residential Construction, Sovereign Debt, Spillover, Target Rate, Td Economics
Posted in Canadian Market, Markets, Outlook | Comments Off

Bank of Canada Raises Rates As Expected (Update)

Tuesday, June 1st, 2010

The following are two comments from TD Economics’ Grant Bishop, and Miller Tabak’s Peter Boockvar (following the TD comment), regarding today’s BoC decision to raise policy rates.

This comment is a guest contribution by Grant Bishop, Economist, TD Economics.

June 1, 2010

Data Release: BANK OF CANADA EMBARKS ON THE UPWARD CLIMB [PDF Download]

• The Bank of Canada commenced tightening of monetary policy with a 25 basis point hike, increasing the overnight target rate to 0.50%. This move was widely expected given the strong Q1/2010 GDP performance and acceleration in core CPI. Having taken the overnight target rate off its lower bound, the Bank also normalized the operating band, reestablishing its deposit rate and lending (the “Bank Rate”) at 25 basis points below and above the target, respectively.
• The text of the announcement highlighted Canada’s strong performance, observing the robust first quarter growth and resumption of employment growth. It pointed to the strength of domestic demand through the housing and consumer spending.
• However, the Bank stressed that household expenditures will necessarily moderate to pace more in-line with income growth, reducing the contribution from consumption and residential construction in the coming quarters. Moreover, the Bank observed that business investment still has yet to take the baton, noting that “the anticipated pick-up in business investment will be important for a more balanced recovery”
• The statement was also keenly attentive to the international setting and its downside risks. Although the volatility from sovereign debt fears has somewhat subsided in the past weeks, the Bank notes that that the Eurozone tensions will likely prompt increased borrowing costs and more rapid fiscal consolidation for some countries. While the Bank observes that spillover to Canada has so far been modest and limited to commodity prices and some heightened financial stress, it observes that the “broad forces of household, bank and sovereign will add to the variability, and temper the pace, of global growth.”
• Looking ahead, anticipating a moderating clip for domestic demand and bearing the recent global volatility in mind, the Bank stressed the “considerable uncertainty surround the outlook” and stated that “any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.”

Key Implications

• Remembering that monetary policy only impacts with a lag, the exceptional near-term performance of the Canadian economy and stickiness in core inflation point to a necessary tightening to begin to restrain price growth. The Bank of Canada has the sole mandate of achieving its 2% inflation target and conducts its policy through that exclusive prism.
• Although the near-term economic strength will ebb, the uptake of slack and rebound in price growth meant it was due time to take interest rates off their emergency level at the effective lower bound. Nonetheless, today’s 25 basis point increase represents a modest tightening and still leaves rates at very accommodative levels.
• The decision does mean that a rebalancing of monetary policy has commenced and interest rates will be lifted as economic slack is absorbed to restrain price growth. Nonetheless, the wording of the announcement indicates that in undertaking subsequent rate hikes the Bank will remain very attentive to the likely moderation in domestic demand and developments in the global financial system.
• While the Bank took the “elevator down” when cleaving rates, ongoing uncertainties and an easing pace of growth point to a very careful pace of tightening. The Bank may not hike at each meeting and might “pause” on increases if near-term financial conditions warrant. The emphasis on global conditions in today’s communiqué is no accident and, after the rocky last couple of years, policy-makers are keenly aware that Canada is not an island.
• Barring unforeseen shocks in global financial markets, based on our outlook for economic growth and inflation, we anticipate a sequence of 25 basis point increases at subsequent announcements, with the overnight rate at a still-stimulative 1.50% by year’s end.

Grant Bishop, Economist
416-982-8063

DISCLAIMER

This report is provided by TD Economics for customers of TD Bank Financial Group. It is for information purposes only and may not be appropriate for other purposes. The report does not provide material information about the business and affairs of TD Bank Financial Group and the members of TD Economics are not spokespersons for TD Bank Financial Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. The report contains economic analysis and views, including about future economic and fi nancial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affi liates and related entities that comprise TD Bank Financial Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

This note is a guest contribution by Peter Boockvar, Equity Strategist, Miller Tabak, via The Big Picture.

Following yesterday’s 6.1% annualized Q1 GDP gain (vs expectations of 5.9%), the Bank of Canada raised rates by 25 bps to .50% as expected. While some may say that how can a major G7 country raise rates with all the global economic uncertainty, Canada’s strong banking and commodity focused economy is on much stronger footing and the BoC specifically said that even with the hike, “this decision still leaves considerable monetary stimulus in place.” With respect to future moves, the BoC said “given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.” In response to this uncertainty over when they may hike again, the Loonie sold off 1.5 (cents) vs the US$.

Source: The Big Picture

Peter Boockvar – Equity Strategist
Peter Boockvar is currently the Equity Strategist at Miller Tabak + Co., LLC., in addition to his role as a salestrader on the equity desk. He is often seen on Bloomberg TV, Fox Business, CNBC, and CNBC Asia and is frequently quoted on Reuters, Dow Jones Newswires, Financial Times, Wall Street Journal, and The Associated Press. He joined Miller Tabak + Co., LLC in 1994 after working in the corporate bond research department at Donaldson, Lufkin and Jenrette. He is on the Board of Directors of Ameritrans Capital Corporation, a publicly traded Business Development Company. He is also president of OCLI, LLC and OCLI2, LLC, farmland real estate investment funds. Mr. Boockvar graduated Magna Cum Laude with a B.B.A. in Finance from George Washington University.

Tags: Bank Of Canada, Basis Point, Basis Points, Boc, Bond Research, Business Development Company, Canadian Market, Cnbc, Cnbc Asia, Co Llc, Commodity Prices, Consumer Spending, Core Cpi, Donaldson Lufkin And Jenrette, Dow Jones, Dow Jones Newswires, Downside Risks, Employment Growth, Financial Stress, Financial Times, Fiscal Consolidation, Forc, G7 Country, George Washington University, Global Economic Developments, Global Economic Uncertainty, Household Expenditures, Lower Bound, Magna Cum Laude, Miller Tabak, Quarter Growth, Real Estate Investment, Real Estate Investment Funds, Residential Construction, Sovereign Debt, Spillover, Target Rate, Td Economics, Tv Fox, Wall Street Journal
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How Solid are the BRICs? (Part 1)

Tuesday, January 15th, 2008

According to IMF research, about 50% of global GDP growth now originates from BRIC countries. Incremental growth in demand for oil by India and China is driving the price of crude higher. Same for food prices. This is great for oil producers and agriculture commodities and stocks.

It may also prove to be beneficial as a needed and market driven cooling mechanism for higher-than-expected growth in the BRIC (Brazil, Russia, India, China) and other emerging markets, which are driving the average higher for world economic growth. Just how solid are the BRICs?

As BCA points out in The Oil Tax, higher oil prices have the same effect as rising “taxes” (globally), an organic form of economic tightening and will dampen the hopes of central banks as they move to stimulate the world economy with interest rate cuts. If oil prices continue higher, central banks will have to become more aggressive in order to stimulate economic growth. This is the problem in industrialized countries, but NOT in emerging markets.

As we pointed out in Rx for China, a US recession may be just what the doctor ordered, in the form of an “imported soft landing”. China, for example, has been trying to tame growth for years with their own monetary tightening. Rising oil prices, which are an economic dampener for industrialized net oil-consuming countries, may provide the cooling of growth that emerging countries have been wanting to achieve.

As the central banks of the industrialized world (Fed, ECB, BOJ) move to provide economic stimulus in the form of more interest rate cuts, the ensuing monetary liquidity spillover makes for an abundance of cheaper capital, flooding emerging markets with investment, as investors look for growth offshore.

According to BCA, the decoupling of emerging markets is expected to persist into 2008 as a result of these factors in tandem with robust domestic fundamentals. For the BRIC economies, and other emerging markets, this is potentially very promising. In part 2 (to follow) we will take a look at some of the economic and market fundamentals for the BRIC bloc, so stay tuned.

Read on: The following 4 articles highlights growth and inflationary concern in BRIC countries.

Brazil Economists See Faster Inflation, Higher Rates

http://www.bloomberg.com/apps/news?pid=20601086&sid=ag_GSEXHPVhQ&refer=news

Russian inflation 11.9 pct in 2007 – official data

http://www.forbes.com/markets/feeds/afx/2008/01/09/afx4510431.html

RBI’s rate hiking spree may halt http://economictimes.indiatimes.com/News/News_By_Industry/Banking_Finance_/RBIs_rate_hiking_spree_may_halt/articleshow/2703424.cms

China’s nerves on edge over inflation

http://uk.reuters.com/article/businessNews/idUKPEK22115220080113

Tags: Agriculture, Agriculture Commodities, Banks, Blog, Bloomberg, Brazil, BRIC, Bric Countries, BRICs, Central Banks, China, Commodities, Dampener, ECB, Economic Stimulus, Economists, Economy, Emerging Market, Emerging Markets, Fed, Food prices, GDP, GDP Growth, Global Gdp, GSE, higher oil prices, Imf, Incremental Growth, India, India China, Industrialized Countries, industrialized net oil-consuming countries, inflation, Interest Rate Cuts, International Monetary Fund, Investment, liquidity, Markets, Miscellaneous, oil, Oil Prices, Oil Producers, Oil Tax, Recession, Rising Oil Prices, risk, Russia, Spillover, UK, United States, Us Federal Reserve, World Economy
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Morgan Stanley’s Global Outlook for 2008

Thursday, January 3rd, 2008

Take a look at Morgan Stanley’s global outlook for 2008. Economic reports always require translation and this one is no exception.

If you read between the lines the message is there.
 

Message:
Emerging markets demand and consumption growth will provide a cushion to make the economic landing “soft.” Regional monetary tightening in EM will be overshadowed by the liquidity spillover from industrial country monetary policy easing. This should prove favourable for EM equities and put some strain on industrialized country equity markets, with some exceptions such as Canada, and Australia.

Here is the overview:
 

Global: 2008: The Year of Recoupling    
Global Economics Team  
Our baseline outlook points to continued global expansion through 2009, but with a pronounced slowing next year.  Courtesy of the turmoil in global credit markets, and paced by a mild US recession and slower growth in Europe and Japan, we are forecasting a downshift to 4.3% growth in 2008.  While still well above the 45-year growth trend of 3.7%, such an outcome may feel downright sluggish following the 4.9% average pace over the 2003-07 period — the strongest half-decade stretch of global growth on record.  The outcome can hardly be called a soft landing with the US in a recession, however mild, and considerable risks remain.  With policy offsetting, however, we expect a re-acceleration to 4.9% global growth in 2009. 
 

The coming global downshift will likely mask considerable regional disparities.  We expect growth in the industrial world to slow to only 1.4%, while the developing economies, led by China, will hardly miss a beat.  In the US, we expect a credit-cum-housing-induced mild recession to persist through 1H08, and sluggish growth in Japan, the UK and the Eurozone.  But the credit turmoil is becoming global, menacing even weaker growth outside the US. Critical to the global call is the expected resilience of Asian, LatAm and OPEC economies.  Whether the knock-on effects on exports from China, Mexico, Canada, Japan, and other Asian economies tied to China’s supply chain will overwhelm their increasingly strong domestic demand remains uncertain.  With China tightening into the teeth of this slowdown, the risks are on the downside of this baseline scenario. 
 As we look ahead to 2008, the asynchronous character of the global economy seems likely to persist.  If global “decoupling” was the key theme for 2007, global “recoupling” may well be the dominant issue for the coming year.  The extent to which markets, policy and economies are linked may also enter the debate, as tighter financial conditions require aggressive and/or unconventional policy responses, such as the one just launched by five central banks to provide market liquidity.  And investors fear that a new wave of inflation may emerge from the booming economies of Asia, OPEC and Latin America.  
 

This is the final issue of the Global Economic Forum for 2007.  It has been a tumultuous year for the global economy and financial markets, and we enter 2008 with substantial uncertainty.  Hopefully the following 31 dispatches will provide perspective as you weigh the prognosis for the world economy and financial markets.  We will resume regular publication on Wednesday, January 2, 2008.  Our very best wishes for the Holiday Season. 

The soft landing scenario, and the expectation that global growth from emerging markets is critical to the Global call, are enduring themes, and though this report does not confirm the likelyhood that there is sustainability, the intent is NOT to drive consensus, but rather allude to uncertainty, so that consensus remains unlikely. The message is in between the lines. You decide.

Tags: Asia, Australia, Banks, Brazil, BRICs, Canadian Market, Canadian Stocks, Central Banks, China, Commodities, Consumption, Consumption Growth, Credit, Credit Market, Credit Markets, Developing Economies, Downshift, Economic Reports, Economics, Economics Team, Economy, Emerging Market, Emerging Markets, Euro, Europe, Eurozone, Global Call, Global Credit, Global Economics, Global Expansion, Global Growth, Global Outlook, Gold, Growth Trend, India, inflation, Information, Investment, Japan, Latam, Latin America, liquidity, Markets, Metals, Mexico, Miscellaneous, Monetary Policy, Morgan Stanley, oil, Opec, Organization Of Petroleum Exporting Countries, Recession, Regional Disparities, Russia, Slowdown, Sluggish Growth, Spillover, UK, United Kingdom, United States
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