Credit Suisse is still bullish on the economy and the equity markets. They believe we are experiencing a typical mid-cycle slow-down and NOT a double dip. The following 5 reasons outline their thinking:
- Global PMIs are consistent with 3.5% GDP and European PMIs with 2.5% GDP (against our economists’ forecasts of 4.3% and 2.5% in 2011, while consumer confidence is rising in Europe). We acknowledge that the US is experiencing a mid-cycle slowdown, but this is normal – and our high-frequency economic indicator is now consistent with GDP growth of 2.1% (up from 1.4%);
- Corporates appear under-invested (the investment share of GDP is near record lows, free cash flows are high, leverage is only at average levels and returns on tangible assets are high). Investment intentions have held up well;
- US corporates appear to have overshed labour: from peak levels, hours worked is down 7.5% while GDP is down 1.3%. Our employment model is consistent with c1% annualised employment growth. Income growth is picking up on an increase in the work week.
- Emerging markets now account for 48% of global GDP – and China alone has accounted for 36% of the increase in global growth since 2006. We believe that China will have a soft landing (PMIs are consistent with 9% to 10% GDP growth, core inflation is just 1.1%, we believe a 20% to 30% fall in house prices is manageable and China remains under-leveraged and has not run out of labour or capital).
- The power of near zero bond yields: over the last three months, 5-year real bond yields have fallen from 0.6% to 0.2%. Low real rates help to improve government funding arithmetic (at zero real rates, US fiscal tightening of just 4.5% of GDP is needed to stabilise government debt to GDP), drive down the saving ratio and support risk assets