December 11, 2006
By Stephen S. Roach | New York
In looking to 2007, my main message is to be wary of extrapolation. After a powerful four-year boom, an important transition lies ahead for the world -- both on economic as well as on political terms. The consensus appears to be unprepared for the full extent of the transition that could well occur -- banking on the benign outcome of a soft landing in the US to be offset by accelerating growth elsewhere in a decoupled world. The official baseline forecast of the IMF is quite consistent with such a sanguine prognosis. It calls for a 4.9% increase in world GDP next year -- virtually identical to the 4.8% average gains over the 2003-06 period. The Morgan Stanley forecast of 4.3% global growth is already well below that consensus. As post-housing bubble adjustments begin to play out in the US, the lags of an interdependent and still unbalanced global economy are only just beginning to kick in. And a new group of politicians is only just beginning to take the reins of power. All this underscores the possibility that we may not have gone far enough in factoring in the downside risks to global growth in 2007. Transitions are never easy -- especially when juxtaposed against the complacency spawned by four fat years.
SPX price target raised to 1525 for 2007.
It's a "Growth Recession," Not a Lasting Downturn
December 11, 2006
By Richard Berner | New York
Forecast at a Glance
Years: 2006E 2007E 2008E
Real GDP 3.3% 2.4% 3.0%
Inflation (CPI) 3.3 1.6 1.9
Unit Labor Costs 3.3 3.2 2.7
After-Tax "Economic" Profits 22.2 3.8 4.7
After-Tax "Book" Profits 19.3 2.1 2.4
Source: Morgan Stanley Research E = Morgan Stanley Research Estimates
We've sharply cut our near-term expectations for US growth, with the advance in GDP averaging 2% annualized for the three quarters ending in the first quarter of 2007, or about 0.6 percentage point below our estimate of just a month ago. More important, while our estimate of roughly 1½% for the fourth quarter of 2006 is the low-water mark for growth in our baseline outlook, the pickup we now envision likely will be slow, and a return to the trend of 3% probably awaits the summer of 2007.
This "growth recession" — a period of growth appreciably below potential — likely will last long enough to reduce somewhat the lingering upside risks to inflation. As we previewed last week, the combination of slower growth and reduced inflation risks, if it occurs, will thus allow the Fed to stay on hold for much of 2007, and to ease gradually as inflation moves lower late next year and into 2008 (see "Changing the Fed Call," Global Economic Forum, December 4, 2006).
A recession is unlikely, yet the growth will slow down --this is what I see everywhere and in the prices. The issue is what happens to the rest of the world when the US can not consume as much anymore --Mr Stephen Roach raised it again...