Global Economic Weekly：How much inflation is “Made in China”?

c58da9b710df662c BofA 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. 11014520 Global Economic Weekly How much inflation is “Made in China”? „ Global: How much inflation is “Made in China”? A hot story in the markets is that China is moving from exporting deflation to the world to exporting inflation. However, in all likelihood the impact on inflation in the developed world will be small. United States: No pain, no gain Despite tough talk on the deficit, Washington doesn’t seem willing to make the painful choices needed to achieve meaningful cuts. Canada: Discounts = spending Inflation is tracking the BoC’s low expectations but retail discounting is producing strong sales suggesting GDP will grow by more than the Bank predicts. Euro area: Spain: making the right moves Our baseline is that Spain’s efforts will pay off and that it will manage to issue debt. We believe that this crisis will prompt the EU to adopt a more comprehensive solution covering both banks and weaker sovereigns. UK: What on earth is a central bank supposed to do? Continued above-target inflation poses risks, but we highlight various factors that could restrain inflationary pressures from potential increases in consumers’ inflation expectations. Japan: Who spent, who saved? We highlight the differences between older households who responded to government incentives to purchase autos and appliances and younger households that reined in consumption and increased their savings. Australia: The turn of the RBA The turn of the RBA. After a two month hiatus the RBA returns from summer holidays facing a different landscape, literally. Emerging Asia: Ranking inflation risks Inflation remains a top market concern. However: (1) there is tremendous variation across emerging Asia (2) the end of QE2 could reduce inflation expectations; (3) quite a bit has been priced into Asian fixed income markets. Emerging EMEA: EEMEA: winners & losers from higher oil We take a look into the impact of oil prices on GDP growth, current account and inflation across EEMEA and conclude that Turkey is the most vulnerable, while oil exporters (Russia, GCC and Iraq) would benefit. Latin America: Fine-tuning 2011 We tweak our country forecasts slightly, but keep them consistent with our year-ahead themes and our underlying macroeconomic outlook for the region. We raise our inflation estimates for Brazil and adjust our ‘11 GDP forecast in Mexico. Economic Analysis Economics | Global 28 January 2011 Global Economics Team +1 646 855 9322 MLPF&S Ethan S. Harris +1 646 855 3755 North American Economist MLPF&S ethan.harris@baml.com See Team Page for Full List of Contributors Table of Contents Global overview 2 Global economic calendar 5 United States 6 Canada 8 Euro area 10 United Kingdom 12 Japan 14 Australia/New Zealand 16 Emerging Asia 18 Emerging EMEA 21 Latin America 25 Global forecasts 28 robert.drake@galaxyentertainment.com Robert Drake 01/29/11 03:12:48 AM Galaxy Entertainment Group Lim {Inv. Relations} Global Economic Weekly 28 January 2011 2 Global overview How much inflation is “Made in China”? „ Review: Both the FOMC and BoJ left monetary policy on hold as both economies continue to be plagued by wide output gaps and too-low inflation. „ Hot topic: China seems to be moving from exporting deflation to the world to exporting inflation. However, in all likelihood the impact on inflation in the developed world will be small. „ Preview: Global manufacturing PMIs are released on Tuesday will likely show the manufacturing sector continues to outperform. On Thursday we expect the ECB to leave monetary policy unchanged. An inflationary force Back in 2007, Alan Greenspan argued that China was the key to low inflation and that a rise in export prices from China could unleash significant inflation pressure globally. More recently emerging markets team has written about this: Asia Macro Weekly, 21 January 2011. They note the dwindling supply of surplus rural workers has created upward pressure on wages, with migrant wages rising 18.7% in the three quarters of last year relative to the prior year. And they note that “at the latest Canton Fair in October-November 2010—one of the largest events pairing Chinese exporters with global buyers...prices of labor-intensive goods, such as clothing, shoes, and luggage, were hiked by 10-20%.” There is little doubt that the inflation picture is changing in China, but how big is this story for inflation in the developed world? Could the swing in Chinese inflation offset an otherwise disinflationary environment in the US an