Thursday, December 21, 2006

"Global Rebalance, Consumer Imbalance / us spillover risks / pimco"

a very detailed outlook from pimco. but i have to admit that they seem to be very optimistic in their assumption regarding the impact of the housing slump in the us. so i think their call for a soft landing is very optimistic. but they made it clear that the risk is to the downside.

sehr ausführliche vorschau auf 2007 von pimco. muß gestehen das ich denke das sie sehr optimistisch im zusammenhang mit dem rückgang im us immomarkt umgehen. denke dager das deren soft landing wohl eher optimistisch ist. immerhin sagt pimco das die risikien klar gen süden gehen.

The PIMCO outlook sees growth coming in at close to 2% in the U.S., Eurozone and Japan over the next 12 months. The U.S. growth forecast is below the consensus 2½% expectation, ...... The 2-2½% range for U.S. inflation, measured by the core PCE index, suggests a modest pace of disinflation next year, .........

Overall, this adds up to a soft landing for the U.S. economy and for the global economy following a period of robust global growth. The Federal Reserve and a number of other central banks remain focused on late cycle inflation risks, but we expect those concerns to subside. We expect a combination of continued sub-par growth and an improving inflation outlook to lead to Fed rate cuts, starting after the first quarter. ( not because inflation is low but the economy is heading south.../ aber nicht wegen der infaltion sondern wegen der schwachen us wirtschaft......)

Overall, we see the risks to our U.S. soft landing call as slanted to the downside. The U.S. housing market, which helped to support U.S. consumer spending and in turn the global economy earlier in the decade is now a significant source of global risk. Eurozone and Japanese economic performance has improved markedly. But growth that is driven by investment spending rather than consumer spending remains vulnerable if U.S. consumer spending slows significantly. The U.S. remains the world’s bass drum.

Partial Rebalancing
Slower U.S. growth means that the world economy has become a bit more balanced. ...... In the past two quarters the Eurozone economy has grown at a 3.1% annualized rate, faster than the 2.4% growth rate in the U.S.

Within the U.S., growth has become more balanced, shown in Figure 2, owing to the moderation in consumer spending and the housing correction. U.S. consumer spending has cooled, growing by 2.7% year over year in the third quarter, compared with an average of about 3.5% since the start of 2004 and 3.7% over the past decade. Over the past two years U.S. GDP and U.S. domestic demand have expanded at the same rate. In contrast, over the past 10 years, domestic demand growth outstripped GDP growth by about half a percentage point per year. The current account deficit, which increased from 1% of GDP in 1996 to more than 7% in the fourth quarter of 2005 has since stabilized below that level.

The U.S. housing sector is in recession, with residential investment subtracting about 1 percentage point from the annualized GDP growth rate over the past two quarters. PIMCO’s housing experts expect that the housing market correction will be a long and drawn out process. Over the cyclical horizon, we expect residential investment to continue to subtract from GDP at a somewhat lesser rate. The labor market remains strong but over time we expect the weakness in the housing and related sectors to feed into job losses. The impact of the housing market on related sectors can already be seen with the ISM manufacturing index dipping below 50, reflecting the impact of the housing market inventory correction and also the Detroit car manufacturers’ woes.

Consumer Imbalance
The clearest sign of decoupling in the U.S. lies in the fact that the ISM non-manufacturing survey indicates the service sector remains strong, to date.(only a matter of time .../ nur ne frage der zeit....) The clearest sign of global decoupling lies in the fact that business surveys in the Eurozone and Japan remain at elevated levels, even though the expectations components have weakened.

Strong business confidence is reflected in strong investment spending. Gross fixed capital formation in plant and equipment has grown at close to a 6% rate in Japan since the start of 2004. Eurozone overall gross fixed capital formation grew at close to a 3% rate over the same period.

But as Figures 3 and 4 show, consumer spending has lagged, growing at about a 1.5% rate in the Eurozone and a bit slower than that in Japan. In part this reflects weak wage growth, which has been held down by both cyclical and secular factors, even though employment growth has strengthened this year.

On PIMCO’s baseline forecasts, a U.S. soft landing and growth at trend in the Eurozone and Japan next year will hopefully facilitate a handover to consumer spending outside the U.S., which is crucial to a rebalancing of the global economy over time. It would be easier to be confident that global rebalancing would continue during continued sub-par U.S. growth – or if there was a hard landing in the U.S. – if consumer spending rather than investment was already driving growth in the Eurozone and Japan. Business confidence and investment plans are likely to be highly sensitive to weaker than expected global growth...... (lots of if´s......./ ne menge wenn´s......)
U.S. Spillover Risk
The key uncertainty in judging the U.S. outlook is whether the housing market inventory correction will prove to be relatively well contained, or whether there will be domestic spillover effects to consumer spending........ The lagged impact of below-trend growth, including expected continued contraction in housing and housing-related sectors, is expected to translate into job losses. here is more on the jobs picture and the ripple effect,,

Trying to assess the impact of flat or lower home prices on consumer spending is more of a walk in the dark. A large part of the problem is that there is no U.S. precedent for the current conjunction of a housing correction, a personal savings rate of zero and the uncertainty created by the boom in mortgage equity withdrawal (MEW) in recent years and its uncertain relationship with consumer spending. Therefore, it is necessary to be modest in making a forecast.(better be realistic.../ lieber realistisch...)

PIMCO’s forecast of a U.S. soft landing includes the expectation of a moderate slowdown in consumer spending next year, with the negative ongoing impact from the housing market partially offset by wage growth and the boost to real incomes from lower energy prices. But there is a great degree of uncertainty in the outlook.......

The wealth effect from rising asset prices, and the greater ease of liquefying house price gains, has meant that, in aggregate, U.S. households have stopped saving out of income. Savings rates are hard to forecast, but the current stagnation of house prices and a reassessment of the rate of future house price appreciation will put upward pressure on the savings rate over time. ( fro here on there is only one way t go..., kann eh nur noch nach oben gehen....)

U.S. consumer spending has proved largely impervious to the forces of gravity in recent years. If MEW turns out to have been an important driver of consumer spending, then the leveling off of house prices and associated drop in equity withdrawal may have a more direct, mechanical and pronounced impact on consumer spending. .....(i´m reading this correct. they put an if in front of the mew impact. what a joke. just look at the mew impact on gdp.../ kann meinen augne nicht glauben. die stllen in ihrer vorhersage für 07 den einfluß des mew in frage. bei dieser grafik schwer zu verstehen.....)

The experience of the U.K. and Australia offer both comfort and warning. Consumer spending growth decelerated when the housing markets slowed in those countries in 2004-2005, but it did not grind to a halt. But it is not clear how useful those examples will prove as guides. The U.K. was helped by buoyant global growth and Australia by the commodities boom. Neither had the same huge rise in housing inventory that we have seen in the U.S.

Global Spillover Risk
Canada and Mexico
are the economies most directly exposed to weaker U.S. growth. But in thinking about the impact of a weaker U.S. growth impulse on the global economy, direct trade links are only the starting point.

Figure 5 summarizes the ways in which weaker U.S. growth can impact the global economy, including trade, business confidence and a broad array of financial market linkages. Indeed, U.S. economic data and associated market movements at turning points in the U.S. cycle tend to have a greater impact on Eurozone and Japanese markets than the local data. ......

the Eurozone is experiencing another form of spillover, in the form of the euro’s appreciation against the dollar.

A U.S. slowdown as a result of a U.S.-centric housing correction is very different to the 2001 experience of a common shock in the form of a stock market/capital spending bust. While business investment is strong in the Eurozone and Japan, it is vulnerable in the event that below-consensus U.S. growth feeds into weaker business confidence around the globe.....

.... As for monetary policy, one question is how long the window of opportunity remains open for the Bank of Japan and possibly the European Central Bank to raise rates further. Fed rate cuts would send a signal of external risks. In the event of weaker than expected growth, the BoJ will be extremely reluctant to cut rates and past experience would suggest that the ECB would be in no hurry at all to react.

Monetary policymakers in English speaking countries, which are further ahead in the rate cycle and, like the Fed, currently focused on near-term inflation risks, would be the first to follow the Fed’s lead.

China has provided an increasingly important source of demand growth in Asia owing to its rapid economic expansion and openness to trade. The U.S. has accounted for about 20% of overall global growth since 2002, measured at purchasing power parity (PPP) exchange rates, while China has contributed 30% of global growth. ......In spite of its rapid growth, in nominal U.S. dollar terms, China’s economy is not much larger than the U.K.

Since trade accounts for such a large share of China’s economy, the gap with the U.S. in terms of imports is much narrower than the GDP gap. In October, U.S. imports were worth about $182bn while China’s came in at about $64bn. But a large share of that import bill represents intermediate goods shipped in from China’s neighbors to be re-exported in the form of finished goods to the U.S., meaning that independent of the Chinese authorities’ efforts to slow investment spending, slower U.S. growth should have an impact on Chinese import demand. The U.S. trade deficit stood at $59bn in the month of October. China’s trade surplus was $24bn. Over time, continued growth and a shift towards consumption will mean that China will indeed emerge as a second global bass drum. For now it is the high-hat cymbal.

To give an idea of the amount of ground that would have to be made up in the event of a more pronounced slowdown in U.S. consumer spending, it is worth noting that U.S. consumer spending accounts for about 21% of world GDP, compared with 14% for the Eurozone and a similar amount for the whole of Asia, including Japan and China. As for the oil exporting countries, the OECD2 points out that in spite of the big rise in petrodollars over the past few years, merchandise exports from its member countries to OPEC have been decelerating since early 2005. Oil exporters have taken over from developing Asian nations as the largest component of the global savings glut, measured by their combined current account surpluses.

Over time, strong growth in China and other emerging market countries will reduce the role of the U.S. in setting the global tempo – a long-term decoupling. ....... Every country can’t run a current account surplus: the world is a closed economy.

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