BAS-ML Economics – Global Economic Weekly: Too early to withdraw the stimulus

Summerized bellow is a recent Banc of America Securities-Merrill Lynch research report titled, “BAS-ML Economics – Global Economic Weekly: Too early to withdraw the stimulus”, dated 10 July 2009, authored by Riccardo Barbieri, head of international economics, global rates and currencies research at Banc of America Securities-Merrill Lynch.

Our recovery call is predicated on continuing stimulus
This week’s G8 statement suggests a broad agreement on the need to maintain an unusual degree of monetary and fiscal stimulus. We believe that even as governments should ready fiscal consolidation plans for the medium term, the fiscal stimulus must be maintained at least throughout next year. Our above-consensus global real GDP forecast is predicated in part on continuing support from fiscal and monetary policy.

The inventory cycle may also be a factor moving forward
Most investors worry about the sustainability of the nascent recovery once the initial policy boost and the inventory cycle are over. This is indeed a serious concern. However, the existing data suggest that inventories are still high in the US and Europe and that de-stocking continued in Q2. Thus, the upswing in the inventory cycle has not even begun, and, if final demand gradually improves, it will last several quarters.

Our commodity team has raised its oil price forecasts
The near-term projection is for oil prices to retrace their June rally, as indeed has been the case in recent days. However, our strategists have raised the average Brent oil price forecast for 2009 from US$52/bbl to US$59/bbl and the one for 2010 from US$62/bbl to US$75/bbl. They expect global oil demand to rise by 1.3 million b/d next year, with 85% of the increase coming from emerging markets, consistent with our macroeconomic projections.

Minutes of June FOMC to provide clues about QE program
Next week’s Fed’s Minutes likely will attract a lot of attention given that in the June statement the Fed appeared to suggest that its money-printing program is not cast in stone, as should logically be the case for a central bank that worries about its anti-inflation credibility. The decision by the Bank of England to slow its quantitative easing program has indeed raised the question of whether the ‘second derivative’ of monetary policy is turning. While we do not see an imminent end to unconventional policies, we believe that central banks must convey a clear message to the markets that there is indeed an ‘exit strategy’.

German data suggest the Eurozone cycle is bottoming
The rise in Germany’s industrial production and new orders for the month of May suggests that the improvement signalled by the business surveys was real, especially as it was accompanied by encouraging data for France and Italy. We seem to be on track for an end to the recession in the third quarter.