Merrill forecasts gloom for US economy
By Tom Stevenson
Last Updated: 1:52am GMT 05/12/2007
http://www.telegraph.co.uk/money/mai...merrill105.xml
US interest rates will plunge from 4.5pc to 2pc as the American economy suffers its first consumer recession since 1991, Merrill Lynch has forecast.
The investment bank warned in its annual economic outlook that America is under attack by the
"Four Horsemen" of soaring energy prices, unemployment, a housing slump and an ongoing credit squeeze, but it remained optimistic about prospects for the rest of the world in 2008.
The one significant exception to this global "rebalancing" is
Britain where a "notable slowdown" is predicted. Merrill forecasts three rate cuts by next May, with the first quarter point reduction pencilled in for this week's meeting of the Bank of England's monetary policy committee. The MPC's decision on rates is due tomorrow.
Merrill Lynch's North America economist David Rosenberg presented an almost unremittingly gloomy forecast for the US economy next year.
"The US consumer is on the precipice of experiencing its first recessionary phase since 1991 - the last time we had the combination of high, punishing energy prices; weakening employment conditions; real estate deflation and tightening credit conditions" he said.
The only ray of light is in America's export sector , which Mr Rosenberg said was
"literally booming" as a result of the plunging dollar and still strong growth in the rest of the world. Merrill said investors should play the ongoing shift in economic power in the world by investing in US exporters and companies serving the fast-expanding domestic economies of emerging markets.
Mr Rosenberg said
high energy prices alone would drain 1.5 percentage points from American economic growth and he warned that gasoline prices of more than $3 a gallon were the equivalent of a 1pc wage cut across the US economy, "just in time for the holiday season".
He said growth in
employment had halved compared with a year ago and warned that only three sectors - the government, health and leisure - were still creating jobs. The rest of the economy, accounting for 60pc of all employment, had shed 50,000 jobs in the past two months.
Rosenberg said that in the past 60 years, there has not been a time where the unemployment rate has rose 60 basis points from a cycle low without the economy slipping into recession. The unemployment rate hit 5% in December, up from 4.4% in March last year.
Looking at data released last Friday, he also points to the length of time the jobless have remained unemployed. The number of people that have been out of work for 15 weeks or more has increased by 20% year on year, a pace that prevailed in the early stages of prior economic downturns in April 2001 and August 1990, when the recessions were one-month old.
Aggregate hours worked in the economy contracted at a 0.4% annual rate in the fourth quarter of 2007 and the level of unemployment year on year is up 13%, further signifying that the recession has already began.
“Friday’s employment report strongly suggests that an official recession has arrived. The recession dating committee at the National Bureau of Economic Research will be the final arbiters but since it waits for conclusive evidence it may be at least two years before we are notified.”
On the
housing market, Merrill warned that the supply of unsold new homes had doubled compared with the recent boom years, while sales of second-hand homes had fallen by 30pc.
"We reiterate that real estate deflations are unique and have never ended well for the consumer, the credit market or the economy. We can identify only five periods post WWII when the real value of housing assets turned negative on a year-on-year basis. All of these time periods inevitably included a consumer downturn. Maybe it will be different this time, but we fail to see why," Mr Rosenberg concluded.
Merrill Lynch's gloomy view of the outlook for the world's biggest economy contrasted with its ongoing optimism elsewhere. TJ Bond, the bank's Asia economist, said
"we do not expect any significant slowdown in China. Exports to the US may slow, but this should be offset by China's continued export penetration of other key regions, notably Europe."
He predicted inflationary pressures in Asia but said the flood of surplus labour from China's rural hinterland to the booming coastal provinces would keep rising prices in check for another two years.
One of the major risks to the global economy, Merrill Lynch said, was a dollar crisis but it predicted soaring central bank reserves and growth in sovereign wealth funds would underpin "risky" assets like equities and non-US currencies.