Next year will be one of global economic rebalancing, according to a study by Merrill Lynch.* “Imbalances have already started to unwind,” says Alex Patelis, the investment bank’s head of international economics research.
There are several factors why the bank expects rebalancing to be the dominant macro theme of the next three to five years: the dollar has been declining for several years against a wide range of currencies, America’s debt-laden consumers are likely to curb consumption growth and the outlook for domestic demand growth remains much stronger outside the US.
Merrill Lynch estimates that America’s current account deficit will narrow by nearly three percentage points between 2006 and 2009. Canada, Russia and the Middle East will account for a disproportionate share of this rebalancing.
However, the bank says it is likely the combined Asian current account surplus will widen slightly.
The investment conclusion it draws from the rebalancing trend is that export-orientated companies are likely to outperform in America while domestically-orientated ones will outperform elsewhere,
Merrill Lynch also argues that the decoupling trend will continue in the coming year but that it is misunderstood by most investors. The orthodox view is to focus on the likely impact of an American slowdown on the rest of the world. But Merrill argues it is more useful to look at the risks of strong growth outside the US on America.
It suggests that there are several risks to the American economy as a result of buoyancy elsewhere. These include the possibility of a dollar crisis and of rising inflation in America.
In contrast, Merrill is scathing about those who argue that an American slowdown will damage Asian growth.
Timothy James Bond, Merrill Lynch’s chief economist for the Asia Pacific region, says: “I don’t think we’re going to see much of a slowdown in Asia.” If the region does slow down: “It won’t be brought about by a slowdown in American demand.”
For Merrill the final key theme of 2008 will be the growing importance of sovereign wealth funds. Such funds will grow rapidly while increasing their share of more risky and non-dollar assets.
* “2008: The global macro year ahead”