Bank Research Consensus Weekly 07-27-09

Published July 27th, 2009 - 02:40 GMT

The strong worldwide rally in risky assets since March reflects not just the relief that the worst is likely behind us, but also anticipation of a return to growth for most economies. Much is expected from Emerging Markets, particularly from Asia ex-Japan, which is expected to outperform the rest of the world. Markets and investors realize, however, that not all EM economies are alike, and some will show output growth that is lower than the 1.3% growth our global team expects from the G10 economies in 2010. In this piece, our EM team discusses whether recent ‘green shoots' have changed the outlook for monetary policy, and whether the inflation outlook is likely to act as a constraint on the ability of central banks to provide monetary stimulus to their economies.

Stephen Roach, Head Economist, Morgan Stanley



Weekly Bank Research Center 07-27-09



 

EMerging Challenges for Central Banks

Stephen Roach, Head Economist, Morgan Stanley

The strong worldwide rally in risky assets since March reflects not just the relief that the worst is likely behind us, but also anticipation of a return to growth for most economies. Much is expected from Emerging Markets, particularly from Asia ex-Japan, which is expected to outperform the rest of the world. Markets and investors realize, however, that not all EM economies are alike, and some will show output growth that is lower than the 1.3% growth our global team expects from the G10 economies in 2010. In this piece, our EM team discusses whether recent ‘green shoots' have changed the outlook for monetary policy, and whether the inflation outlook is likely to act as a constraint on the ability of central banks to provide monetary stimulus to their economies. Broadly speaking, central banks seem set to continue to provide monetary stimulus for the foreseeable future. Where growth is already evident, rising asset prices could give reason for central banks to be cautious. In regions that faced significant currency turmoil, the economic bottoming has given central banks some room to cut rates. Inflation is likely to be benign over the next 6-12 months, but inflation risks are not uniformly low across all countries and regions.

 

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United States – Recovery Underway?

Steve Chan, Economist, TD Bank Financial Group

After a year and a half in recessionary territory, is the U.S. economy finally turning the corner? The Minutes of the June 23-24 FOMC meeting were released on Wednesday, and revealed that the Federal Reserve has brightened its outlook for economic growth over the forecast horizon. It is important to note that the Fed’s projection ranges are on a Q4/Q4 basis, while most other economic forecasts are stated in annual averages. Hence, one must be careful in comparing the two.

 

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Corporate Sector Holds Key to Recovery

Trevor Williams, Chief Economist at Lloyds TSB Financial Markets

The credit crisis and the onset of global recession have focused policymakers' attention on how to remedy the economic imbalances both within and across countries. Within the UK, the main focus has been on the imbalances in the household, financial and public sectors. But the non-financial corporate sector balance sheet also has a crucial role to play in the current downturn, and the prospects for this sector, perhaps more than any other, are likely to determine both the breadth and depth of the economic downturn. Through the wages and taxes it pays, and the profits it generates to fund dividend payments and productive investment, the nonfinancial corporate sector lies at the very heart of the UK economy. Without a sustained improvement in business investment, there can be little prospect of a recovery in employment, output or spending or, for that matter, a material improvement in government, household or financial sector balance sheets.

 

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Compiled By: David Song, Currency Analyst and Nolan Mickey, DailyFX

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