Global: A rebalancing act
There is now a broad consensus that the US savings rate is headed higher in coming years. Slower US consumption growth does not mean the US is doomed to weak GDP growth - it means resources will tend to shift over time into other areas such as capital spending and exports. We look for the mirror image of US sector shifts on the other side of the Pacific.
US: Rome wasn't built in a day
The weak employment report is a reminder that the recovery will be choppy. While policy actions play an important role in many theories of economic recovery, and most economists believe active policy helps the economy recover faster, there are many reasons to expect a natural normalization in economic activity. Extreme perma-bear stories have no basis in economic theory or history.
Euro area: Onward and upward
Several of our key global themes are showing up in Europe. First, the latest set of leading economic indicators reinforces our view that economic growth is likely to run ahead of current consensus estimates. Second, inflation remains on a very subdued path. We expect core inflation to retreat from its current level of 1.3% to 1.0% late this year and this gives the ECB plenty of breathing room before monetary accommodation is removed.
Japan: Recovery associated with deflation
One central bank that is a long way from raising rates is the Bank of Japan (BoJ). The latest Tankan manufacturing survey showed that while business conditions are on the mend, the output gap remains exceptionally wide suggesting that deflationary pressure is expected to be with us for some time. We believe the BoJ will stand pat at least until the summer of next year.
Latin America: Brazil: turning even more bullish
Our central themes globally are hitting Brazil, namely stronger growth and moderating inflation. Against a backdrop of a firming economy abroad that will buoy exports and a recovery in the labor market that will put consumers on a firm footing, we are bumping up our 2010 growth forecast to 5.3% from 4.5%. Yet, despite our optimistic growth outlook, the economy would still not be operating significantly above potential and this should keep inflation under control.
Emerging Asia: India: all set to bottom out
India is a bit of a stand-out in that receding growth risks and rising inflation will likely make the RBI one of the first Asian central banks to hike. Events continue to vindicate our contrarian call about India's twin deficit risks as overdone.
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