Merrill Lynch has published their 2009 economic outlook — the over-riding theme? Nothing less than the decline of the West’s financial supremacy.
From the report:
In the emerging world, particularly China, the vulnerability to the US financial crisis is likely to lead to a fundamental rethink of the development model. Expect long-run policies reducing ties to Anglo-Saxon consumption and a rebalancing in the global political power toward the emerging world.……
At its core, the global financial crisis brings an end to the vendor financing model, whereby excess consumption in the US was financed by a savings glut in the emerging world. The market will ensure this adjustment finally happens. This is coming from both directions…
‘Both directions’ being a surge in the US’s personal savings rate (necessitating massive monetary and fiscal stimulus to prevent a deflationary spiral, and a booming US deficit) and the start of real consumption in emerging markets — boosted by stimulus packages like China’s outlined above, according to Merrill’s economics team.
Over-leveraged Anglo-Saxon consumers have been a running theme with the ML economics team for the past few months. Now the great unwind is happening, and the most developed (read: most leveraged) countries are suffering, the theory goes.
That incidentally, was the reasoning behind Merrill’s, um, intriguing, global risk ratings published last month, where Australia, Switzerland, etc. bizarrely came out as the riskiest territories and Nigeria, Mexico et al as the lowest risk.
The team’s always been rather bullish on emerging markets — being a vociferous proponent of decoupling as late as last year.
To wit, TJ Bond, one of their Asia economists even noted then that:
‘We’re doubling down on our decoupling view. Previously we subscribed to the (now consensus) view that Asia could withstand a US ’soft landing’, but not a hard one. Our level of confidence has increased. We now think Asia could withstand a US recession.
Anyway, here are Merrill’s predictions for the coming year (click to enlarge):
In particular, the consequence of massive stimulus (and possible inflationary side-effects from quantitative easing measures) in the US and slowing growth, meanwhile, will be an eventually weaker dollar — the world’s reserve currency.
Consumers around the globe will likely adjust in 2009. Some may spend more, some less. This will have meaningful relative value implications for currencies. The global diet is the backdrop to our four themes. It is about rebalancing, resisting spending urges, risk appetite and the interruption of reserve accumulation. Our forecasts reflect a weaker USD by the end of 2009, mainly against EM currencies. We still expect risk aversion and a stronger USD earlier in the year.
In that, Merrill Lynch’s economics team is not alone — Bank of America is also predicting a weaker dollar, as buyers of Fed securities start retrenching to nurse their own economies — not fund the US’s widening deficit.
Related links:
Economic Nationalism and the USD - FT Alphaville
New world (dis)order - FT Alphaville
An impaired Anglo-Saxon - FT Alphaville
Risky territory - FT Alphaville
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