Economists from Royal London Asset Management, Schroders and F&C Asset Mangement are broadly in agreement that growth in the US, China and Japan will continue, albeit challenged, while there are expectations of a move on the dollar vs. renminb question.
The house view from RLAM , as expressed by chief economist Ian Kernohan is the “bears are wrong”.
Despite rumblings of faster than previously expected interest rate rises in the US, RLAM sees continued recovery from the bubble-years of the late 1990s through “global rebalancing”.
This change includes expectations of a revaluation of the renminb later this year. The issue has become a major political issue between China and the US because of the huge imbalance in visible trade between the two countries.
Kernohan expects changes to growth drivers in China and Japan – the former will see consumers take a more important role, the latter will see investment expenditure become more important in driving the economy forward, he says.
US growth will be driven more by corporate spending, and less by consumer spending, he adds.
Schroders' chief economist Keith Wade says his view on the US has changed every so slightly to reflect changes – or not - in the savings rate and consumer spending.
Consumers are still spending, although some downside effects could be felt in overall growth in the first quarter of this year as an effect resulting from the ending of tax breaks on investments.
However, after this “we would expect investment to continue”.
Meanwhile, corporate cash flow and profitability are strong, with the economy moving into the stage of the cycle when increases in investment should be expected, Wade says.
Employment has stabilised, and with that comes the view the key Federal Reserve interest rate could hit 4% by year’s end.
That change “is quite significant” Wade says, although it is felt the economy is capable of dealing with such a change.
Steven Andrew, chief economist at F&C Asset Management expects a slightly less impressive change in US interest rates.
He pegs the Fed’s key rate at between 3% to 3.25% by June, which should then hold through the remainder of the year.
Jobs will be added to the economy, but not at an increasing rate, because there do not seem to be any pressing reasons why companies should ramp up hiring, Andrew says.
Business investment will remain high, however, with expectations of a year-on-year increase of 8% through 2005 compared with 2004, however there could be a slight fall in GDP growth on an annualised bases through the first couple of quarters of the current year.
Consumer spending will likely continue to be affected by mortgages – equity release from remortgaging being a major factor in consumer spending in the past few years – and 30-year and 15-year rates are now lower than they were when the Fed raised its key rate in mid-2004.
And it would take a major change to shift these rates higher, Andrews suggests.
Closely tied to the growth of US GDP is its propensity to draw in imports from Asia.
All three economists expect some change on the issue of China’s renminb, which currently is pegged to the dollar. Unlike companies in the eurozone, those exporting to the US from China have not suffered as the dollar has fallen against a number of other floating currencies.
Schroders’ Wade feels there is a good chance the renminb will appreciate, but only if the dollar is stable.
Instead of a direct change in the peg rate against the dollar, China’s currency is more likely to be traded against a basket of currencies, including the dollar, yen, other Asian currencies, and possibly the euro.
Steven Andrew agrees with the caveat suggesting the move to a basket has to be put in context of all the rumours surrounding the Chinese government’s next big move on the issue.
Also key to the discussion is how, exactly, to view the dollar’s movement.
On a trade-weighted basis, the dollar is down 30%, and might have another 5% to fall, Andrew says.
History shows the dollar has moved up to 40% on a trade-weighted basis, which means the currency should be nearing the trough so any further rates of depreciation should take place at a decelerating rate, he says.
Politically speaking, China’s leaders may also be in the position of recognising the need for some change, but want to be seen to be making their own decisions on the matter, Andrew suggests.
Bond markets will watch any change closely as it may be tied into the question of future Chinese buying of US Treasury Bills because the implication is any change could generate fallout for the US consumer, Keith Wade adds.
Where Kernohan sees consumers taking a more important role in China’s growth, Andrew and Wade also see slowing growth rates as the country’s central bank seeks to dampen growth in sectors it sees as growing out of control.
Limiting credit to individual sectors “has allowed them to have bespoke control over individual industries in the economy,” Andrew says.
Domestic demand for credit in China will be more determined by the industry cycle, suggesting a wider economic slowdown will remain, even if consumers do step into any void left by contracting industrial output, Andrew suggests.
Generally speaking, he expects a soft landing, which in turn could affect demand growth in the region. To some extent this is already being felt, with, for example, last year’s lower demand for Japanese goods in China.
Japanese economic data is good to watch regarding changes in China’s economy, Andrew adds. The rate of year-on-year growth in exports to China fell through last year from a near 50% rate to a 20% rate.
Japan itself is a worry because domestic demand does not seem strong enough to make up for lower global export demand, says Wade.
Latest GDP figures indicate some increase in consumption, but not equally strong as rates of growth recently reported.
Andrew says growth in profits from exports over the past year is not yet full reflected in domestic consumption. There are no expectations of a big turnaround in this picture in the medium term, and it may actually be the case consumption deteriorates through the first half of 2005.IFAonline
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