In his newest ‘Sunday Start’ note, Morgan Stanley economist Joachim Fels lays out his argument that the global economy might be stronger than people realise.
First he starts by noting that conversations with investors have turned negative on the economy, as gloom sets in regarding Europe, Japan, China, and the rest of the emerging world. There’s a huge disconnect (something that Dan Greenhaus also talked about) between what’s happening in the world, and what seems to be happening in the US (solid growth, and a return to normalcy).
Anyway, here’s Fels’ optimistic analysis:
My sense is that the published consensus has now come down to or maybe below our own numbers, and the mood among investors on growth is even more negative. Which begs the question: is it time to revise our own outlook lower yet again? Not so. On the contrary, given how fast and far market sentiment has sunk, I think it is time to bang the drums and emphasise my ‘the glass is half-full’ story. For starters, the US economy keeps humming along nicely as illustrated by a better-than-expected labour market report on Friday. Following this week’s data, our US team sees 3Q GDP growth tracking at 3.3%, up from 2.9% last week. Second, the drop in oil prices is a boon for consumers around the globe. Third, lower risk-free bond yields buy more time for EM deficit countries to reduce their external imbalances. Fourth, a stronger dollar is exactly what the doctor ordered for the ailing European and Japanese economies, who are keen to export some of their deflationary pressures back to the US. This in turn will also make early rate hikes in the US less likely as lower import prices combined with a lack of wage pressures will keep US inflation at bay. In this context, note that our FX Strategy team led by our in-house ‘dollar bull’ Hans Redeker has revised up its trajectory for the dollar yet again and is now targeting EUR/USD dollar at 1.12 by the end of 2015. And fifth but not least, keep in mind that subdued and uneven global growth should help to prolong this expansion, which could actually become the longest one on record — the main theme of our ‘Lower but Longer’ Back-to-School Outlook last month. In summary, don’t despair, but believe!