The latest report from BofA Merrill Lynch Global Research, titled, “BofA ML Economics – Global Economic Weekly: Policy pauses and pitfalls, authored by the Global Economics Team at BofA Merrill Lynch Global Research focuses on the continuation of recovery across the globe. Notable is that the developed economies stood out despite the extreme weather conditions that plagued many parts of the Western Hemisphere. In Europe, industrial production rose sharply (1.7% MoM in January), with sizeable upward revisions to the prior months. In the US, reports of the consumer’s demise have been greatly exaggerated. A better-than-expected retail sales report prompted us to take our 1Q US GDP estimate to 2.0% annualized from 1.5%, which means full-year GDP is now tracking 3.2% (from 3.0%). Given that the US economy represents roughly one-fourth of global output, our 2010 global GDP forecast is now 4.4% from 4.3% previously.
Important chapters of the report cover the following topics:
Global: Policy pauses and pitfalls
Market participants tend to think of a countdown to tightening where every subtle signal is weighed and the inevitable exit gets ever closer. Central banks focus on the fundamental backdrop and the risks around that backdrop. For many countries, that means rate hikes are no closer today than they were several months ago. Â
United States: The Fed’s Holy Grail
The Fed will have a very hard time trying to be clear about its exit path while maintaining flexibility to respond to changing fundamentals. As in past cycles, BofA Merrill Lynch expects the markets to roll forward expectations of rate hikes—with the Fed always expected to hike in 6 to 9 months ahead—until the actual first hike in March 2011.
Euro area: Looking beyond the weather distortions
The message remains the same: with economic sentiment almost back to its long- term average, and the hard data playing catch up, BofA Merrill Lynch are comfortable with the call that a rebound in the manufacturing sector, essentially led by the core, will drive an above consensus upswing in the Eurozone this year.
Japan: Clearer inventory cycle
October-December 2009 GDP was revised downward because inventory reductions in 2H 2009 became clearer. If inventory adjustments progress in this fashion, inventory investment will likely start contributing positively to growth from
mid-2010.BofAÂ Merrill Lynch expects that economic recovery will continue in 2010 remains unchanged.
Emerging Asia: Asia’s investment story
Despite uncertainty about the sustainability of the global recovery, the pre-requisites for the start of a multi-year investment cycle are in place. BofAÂ Merrill Lynch expects the investment cycle to be an important longer-term driver of growth, for not only does investment add to current demand, but it also fuels job creation, household income, and ultimately consumption.
Emerging EMEA: EEMEA’s monetary conditions diverge
We introduce new Monetary Conditions Indices (MCIs) for six major markets in the region. We will publish these regularly in the Weekly going forward. Currently, the indices show tight conditions in the CE-3 and loose conditions in Israel, South Africa and Turkey. These findings are in line with our relatively dovish/hawkish views on future policy rates in these markets, respectively.
Latin America: Elections in Brazil
BofAÂ Merrill Lynch remains very optimistic about the future of the Brazilian economy. With that said, it is expected that the upcoming presidential elections should be treated as a non-event, as markets seem to be doing right now.
