Global Economic Weekly：What if the US double dips?

c58da9b710df662c Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 34 to 35. Link to Definitions on page 33. 10969095 Global Economic Weekly What if the US double dips? „ Global: What if the US double dips? While an outright recession seems unlikely, the US appears to be sliding toward a “growth recession.” We think the global economy is more resilient to shocks from the US, but decoupling is unlikely. United States: One is the loneliest number With two-consecutive quarters with a one-handle, the US is dangerously close to a “growth recession.” Structural unemployment has increased but most of the rise in unemployment is cyclical. Canada: Bank's rule to rule The Bank’s own policy rule suggests rates are at emergency levels, ie, too low, and at least one more 25bp hike is in the cards in September. Euro area: Germany’s interlinked recovery Growth remains heavily export oriented – slower growth elsewhere in the global economy could have a notable impact on Germany, and in turn many other Eurozone economies. UK: The unwinding (or not) of imbalances Some of the imbalances in the UK economy have ameliorated in recent quarters. But in part, that has come at the cost of exacerbating others. Japan: Strong yen starts to take visible toll Yen appreciation has started to constrain exports in value terms through falling prices, as evident in the steep drop in export prices to the EU. Australia: Take me to your leaders Take me to your leaders. No, not Abbott and Gillard trying to put together a minority government, but wilting leading economic index. Emerging Asia: India’s BoP India’s balance of payments risks are overdone, in our opinion. To us, a laAugust 2006 and October 2008, apocalyptic concerns about the current account deficit appear to be a bundle of internal contradictions. Emerging EMEA: EEMEA rates about to turn? Are EEMEA rates about to turn? We don’t think so. We also show that in previous cycles rates only started to rise 50-100D before the first rate hike. Latin America: What’s going on with domestic demand? During past Mexico recessions, recovery dynamics have been pretty similar: initially led by external demand through the rebound of the manufacturing sector, and then gradually spreading to other large sectors of the economy. Economic Analysis Economics | Global 27 August 2010 Global Economics Team +1 646 855 9322 MLPF&S See Team Page for Full List of Contributors Table of Contents Global overview 2 Global economic calendar 4 United States 5 Canada 7 Euro Area 9 United Kingdom 11 Japan 13 Australia/New Zealand 15 Emerging Asia 17 Emerging EMEA 21 Latin America 24 Global forecasts 28 Global Economic Weekly 27 August 2010 2 Global overview What if the US double dips? „ Review: The global economy continues to slow, with notable weakness in the US. Q2 GDP growth was revised down to just 1.6% and we expect only 1.8% growth in Q3. Clearly, downside risks to the economy are growing. „ Hot topic: While an outright recession seems unlikely, the US appears to be sliding toward a “growth recession.” We think the global economy is more resilient to shocks from the US, but decoupling is unlikely. „ Preview: US payrolls are expected to drop 100,000 in August, with a feeble 30,000 gain in private payrolls and large layoffs of Census workers. Little dipper or big dipper? With US data continuing to weaken, a hot question is whether the US economy will “double-dip”. We believe an outright recession—with GDP growth below 0.5% for several quarters—is unlikely, but the probability of a “growth recession”—with growth in the 0.5 to 2.0% range—is steadily rising. We see three reasons to argue for a growth recession: (1) headwinds usually slow rather than reverse growth, (2) historic data on banking crises points to extended periods of weak growth rather than double dips, and (3) all of the sectors that normally collapse in a recession have already overshot to the downside and have yet to recover. Headwinds history In many ways the current US (and global) recovery resembles the last two, with growth held back by an array of headwinds (Chart 1). In the early 90s, then Fed Chairman Greenspan blamed “50 mph headwinds” for the anemic economic recovery. The main head wind was the credit crunch left over from the S&L and banking crisis of the late 1980s. Other head winds included military base closings, tax hikes and continuing corporate downsizing. Without any clear warning, the recovery finally kicked into gear in 1994. A similar story holds for the 2001-03 recovery: the laundry list was different, but the end result was the same. The corporate s