Below is an article from one of the private advisers at Westpac on the state of the world economies and some forecasts;
Hi,
Further to my note last week, we have today received the following summary of interest rate expectations in most of the major world economies. Also attached is a market outlook which provides more context around what is happening in these economies at the moment and some ideas on where we can expect things to head in 2011.
We conducted our annual macro-economic forecasting conference in early March. This conference provides a forum for stress testing our existing views and debating the medium term outlook. A summary of these discussions appears on page 14. The key parameters of our world view remain intact: very modest 2010 recoveries in the advanced countries, consolidation around trend in the emerging markets, risk appetite variable in the short term but solidifying later this year. The US economy is still seen sub-trend, but we no longer expect any negative quarters this year. We reaffirmed our views that the major central banks will not move on policy rates until 2011.
Australia: In a move that did not surprise the markets, the Reserve Bank raised the cash rate from 3.75% to 4.00% at their March meeting. Pricing of the RBA profile was very volatile over the last month. As we go to press, the markets are again expecting a move towards 5% by the end of the year. That looks far too aggressive. We continue to see a pause at 4.5%.
United States: The US economy was a central topic at our conference. The puzzle regarding the US is to find a balance between the observed rebound in activity and the known vulnerabilities with regard to balance sheets. An additional wrinkle is attempting to unbundle the role of stimulus policies from the performance of underlying demand. After much debate, our Fed view remained intact (no move until mid 2011) but we have moved away from having negative growth in any quarter of 2010.
Europe: Euroland’s nascent recovery from recession, which saw output shrink more than 5% from peak to trough, has lost momentum. Meanwhile, the Greek budget drama continues to unfold day by day. Neither the ECB nor the Bank of England will be in a realistic position to raise rates until 2011.
Japan: The Japanese economy is on a recovery path led by the manufacturing sector. However, the growth rate will be insufficient to make a substantial dent in the degree of surplus capacity that emerged during the recession. So while we have revised up our forecasts for the various partial indicators consistent with the degree of healing observed, consumer price deflation looks set to continue out to the horizon.
China: The data flow at this time of year is very difficult to interpret. Rather than tie ourselves in knots trying to make sense of the seasonality, this month we revisit some recent history to increase our understanding of the sectoral and institutional dynamics that underlie the system. We conclude that anything short of policies that actively lean against aggregate demand are unlikely to bring the growth rate down appreciably.
Asia: The regional economy has recovered on a number of metrics. Some countries have recovered completely, regardless of the assessment method. Others have returned to health in a growth sense but are yet to fully reclaim the volume of activity seen before the Crisis. Our forecasts have a Q2 leaping off point for most central banks in the region to begin interest rate normalisation. This has major implications for the currency markets, as in prior cycles the region has waited on the Fed.
Richard Christensen
Private Adviser
Private Banking Wellington
Tel: +64 4 4981064 Level 14, 318 Lambton Quay, Wellington
Mobile: 027 4413677 PO Box 691, Wellington
Fax: +64 4 4981484
Mailto:Richard_Christensen@westpac.co.nz WELLINGTON
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