Stein warns of global “hard landing”

Despite strong years for the global economy in 2004 and 2005, the pace of growth this year is likely to slow. This is the view of Gabriel Stein, director of Lombard Street Research, speaking in the first session of the Fund Strategy Investment Summit.

While Stein predicts a good first half to the year, he says the situation will worsen in the second half as America – which he calls the major driver of the advanced world economy – will suffer a hard landing. Exacerbating the problem, he notes, is that China – which he says is the globe’s “swing” economy – is already in a hard landing.

Stein says: “The problem in America is not its huge current account deficit, but rather the fact that US household debt is growing at a much faster rate than household income.”

As a result of this fact, Lombard Street Research forecasts 6% American GDP growth in the first quarter of 2006, slowing to an annual rate of below 4% in the second quarter, 1.5-2% in quarter three and zero growth in the fourth quarter.

As a result, while American shares will enjoy a good first six months of the year, they will do less well in the second half. He says the opposite will be true of bonds, which will look more attractive as yields on 10-year US treasuries start to fall from the third quarter.

In the absence of strong growth coming from China and America, Stein notes the pick-up in domestic demand in both the eurozone and Japan should help maintain global momentum. However, he says it will not be enough to keep the global economy moving at the same pace it has done for the past two years.

In terms of interest rates, Stein does not see the Bank of Japan ending its zero interest rate policy yet; instead he predicts the rise will take place in 2007. In America, he says, the Federal Reserve will increase interest rates to at least 5%, and possibly as high as 5.25%. However, he adds: “By the end of the year, the Fed will likely start cutting rates again.”