CLSA kicked off its twelfth annual Investors' Forum on a skeptical note yesterday (September 12) as chief economist Dr. Jim Walker outlined slipping confidence in the global economy. Acceleration in the Fed funds rate, an underwhelming year ahead for the Euro, and a downturn of the Chinese investment cycle all highlight what he describes as an uphill struggle for 2006.
Walker expects the Fed funds rate to rise another 200bp over the next nine months, with a 75bp increase coming over the next two meetings. Despite the effects of Hurricane Katrina on equity markets and the US economy, Walker believes the disaster has only delayed the inevitable and has had little to no effect on US monetary policy. In fact if anything he believes Katrina may have increased the prospect of inflationary pressures. Although he anticipates only a 25bp increase at the September 20 meeting, he believes Katrina has only delayed a move to a full half percentage point rise by one to two meetings.
However, this begs the question; is Greenspan capable of taking a tougher stance on monetary policy in his last year? Although his track record says otherwise, recent speeches criticizing the impact of his own loose monetary policy and the prospect of leaving a with a level of credibility lead Walker to believe he will.
Further hindering the global economy will be a projected downturn of the Euro. Appreciation of the Euro accounted for the largest portion of global GDP growth last year. It increased almost 20% against the dollar over 2003 & 2004. But Walker expects the Euro to be one of the weaker currencies in the coming year as the foundations of the single currency deteriorate further. With record high oil and commodity prices taxing already soft demand, added to the Continent's inflated budget deficits, Walker expects real GDP growth to drop below 1% in 2006.
CLSA has also lowered China's forecast growth for next year from 8% to 9% in 2005 to 5% to 7% on expectations the Chinese investment cycle is approaching a consolidation phase, principally in the manufacturing sector. In fact Walker anticipates a hard landing for China as domestic import growth continues to slow. Domestic demand in growth in the second quarter of this year was 8%, a significant drop when compared with the 18% growth rate during the same period last year.
Walker also points out that profits are weakening on unrelenting cost pressures. He believes this will only grow worse as the most drastic hike in oil prices has yet to be realized on corporate earnings because of the state's controlled product prices.
In terms of GDP projections, only Hong Kong, Korea and India are expected to maintain their respective growth levels of 6.5%, 3.5% and 6.6%. He expects the majority of remainder of Asian economies to witness 50% declines.
All in all Walker expects a gloomy new year for the global markets. Welcome to the Forum.
