Forecast Finds Recovery Signs
OCEAN CITY - The global economy is recovering at a faster rate than expected. That's the optimistic conclusion of the Global Economics Midyear Update from Banc of America Securities-Merrill Lynch Research. Although the uncertain market climate is likely to last at least through the end of the year, the research team forecasts a positive outlook for 2010 •€' including a better-than-expected hike in global real GDP growth, to 3.7 percent from 3.2 percent.
The fiscal and monetary stimulus packages, which were designed to revitalize the world's key economies, 'are beginning to bear fruit,' says Riccardo Barbieri, Head of International Economics, Global Rates and Currencies Research at Banc of America Securities-Merrill Lynch Research.
'While we expect global growth in 2009 to come in at -1% in real GDP, the United States and China are expected to be the main forces behind a global recovery in 2010,' he said. 'We've increased our growth estimates for China to 9.6% in real GDP for 2010, up from an earlier estimate of 8.3%. And we project a 2.6% growth rate in the U.S. next year, up from our earlier estimate of just 1.8%.'
Bolstering the encouraging U.S. figures are signs that the housing market is finally bottoming out, business-inventory reduction efforts are winding down, and the stimulus package is spurring consumers to spend •€' albeit modestly. Whereas earlier housing forecasts anticipated a continued drop in residential sales, the latest projections call for a leveling off in the second half of 2009, followed by slow growth in 2010.
'Housing starts in the U.S. economy are already so low that the levels of continued contraction some forecasters were predicting would actually have implied a destruction of existing housing,' notes Barbieri.
So-called destocking estimates •€' or forecasts on reduced retail inventory and output by manufacturers •€' also factor into the improved outlook. Caught by surprise when demand began falling sharply in 2008, manufacturers slashed inventories. In recent months, the drop in production has exceeded the rate of decline in demand. 'That means companies will need to boost production levels over the third and fourth quarters, and inventory-building will turn slightly positive in the second quarter of 2010,' says Barbieri.
Emerging economies will continue to deliver the bulk of global GDP growth in the post-downturn environment, Barbieri projects. 'While the level of real GDP for developed economies is expected to remain at 1.4% below their 2008 peak, the aggregate real GDP of emerging economies will likely be as much as 7.5% higher than 2008 levels, largely because of growth in India and China,' he says.
Lagging behind other countries from a recovery perspective, the euro-zone countries are being hampered by a slow reaction from the European Central Bank, a relatively small fiscal stimulus package and a currency viewed as 15% to 16% overvalued relative to its peers. Individual countries in the region may fare better when some effects of the downturn begin to reverse themselves, notes Guillaume Menuet, Senior European Economist at Banc of America Securities-Merrill Lynch Research. 'Germany, for example, was hit disproportionately hard by the freeze in world trade, so it will likely outperform in the recovery,' he says. In time the recovery is expected to reach the euro zone, but forecasts remain at -4.4% for 2009 and a sluggish 1.2% for 2010.
Similarly, the outlook for the EMEA (emerging markets in Europe, the Middle East and Africa) is slightly more hopeful in 2010. After worse-than-expected results in the first quarter of 2009 as companies cut inventories and investment even more than anticipated, the region is likely to benefit from the recovery of other markets in 2010, with economies that dropped furthest likely to rebound first and most strongly. As a result, the EMEA forecast for 2010 jumped to 2.4% from 1.8% on the upside potential of a handful of countries.
In the Global Economics Midyear Update, Barbieri highlights a number of investment opportunities that align with current trends. These include inflation-linked bonds as well as equities in sectors such as infrastructure and alternative energy, which should benefit from fiscal stimulus. The financial services and auto industries, too, may stand to benefit in the middle to long term from the consolidation they are presently undergoing, Barbieri adds. With emerging markets poised for growth, overseas opportunities will also be compelling. Asian markets, led by China, are expected to outperform the rest of the world during the next five to seven years. And the anticipated recovery of economies like Russia, Turkey, Hungary and Poland may afford equity investment opportunities in these regions.
Barbieri points to one additional silver lining of the recession and the regulatory changes it has spurred: 'Some sectors will become less prone to boom-and-bust cycles. They will deliver longer and more sustainable growth.'
(A Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-8520.)