Bangkok--Feb 2--Aziam Burson
Lehman Brothers, the global investment bank, yesterday held its 2005 Global Economic Conference in Hong Kong. John Llewellyn, global chief economist; Ethan Harris, chief US economist; Michael Dicks, chief economist Europe; Paul Sheard, chief economist Asia; Rob Subbaraman, senior economist Asia; and Jim McCormick, global head of foreign exchange, discussed the outlook for the world's economies and currencies.
The US dollar is set to decline for a fourth consecutive year, while
Asian currencies are likely to take center stage, said Jim McCormick. "A key feature of our 2005 view is that the dollar's decline will increasingly be led by Asia's currencies, instead of the euro," said Mr. McCormick. "We anticipate an Asia currency rally, including a gain of 21 percent for the New Taiwan dollar, and a five to 10 percent initial revaluation for the Chinese renminbi." The Firm's year-end target for the Japanese yen is 90 to the US dollar with the Korean won at 900 to the US dollar. By then, Hong Kong is expected to have the only fixed exchange rate in the region.
John Llewellyn said that Lehman Brothers expects 2005 global economic growth to slow by one percentage point to 2.3 percent, with declining inflation and gradually rising interest rates. However, Lehman Brothers also sees the potential risk of a markedly worse outcome: "Global economic imbalances ? primarily the large US current account deficit ? are now in play," said Mr. Llewellyn. "If any one of these three things happens ? the US does not raise its national savings rate, the weaker dollar does not mitigate the current account deficit, or the dollar decline gets out of hand ? then the prospects for the global economy would worsen significantly."
In Japan, the Firm expects an economic downturn, exacerbated by a strong yen and market volatility; projected GDP growth is just 0.6 percent. "We expect the economy to turn down in 2005, the cyclical recovery having run its course before deflation is overcome. A good deal of market turbulence and reactive policy-making can be expected," said Paul Sheard.
Ex-Japan, the Lehman Brothers' outlook for the rest of Asia is upbeat
with above-consensus GDP growth forecasts for Hong Kong, China, Taiwan and Korea. "Domestic demand is expected to be robust and the region is also benefiting from improved economic fundamentals and long-term structural forces, including a growing middle class, rapid urbanization, financial liberalization, and a younger generation that is more willing to borrow and spend," said Rob Subbaraman.
Lehman Brothers is particularly bullish on the prospects for Hong Kong's
economy, forecasting 5.5 percent GDP growth in 2005. "Hong Kong should get a boost from the sliding US dollar ? to which it is pegged ? but should also benefit increasingly from China's opening economy," said Mr.Subbaraman.
While China's GDP growth failed to slow last year, the Firm believes the
economy is becoming better balanced and expects it to achieve a soft landing of 8.8 percent growth in 2005. Subbaraman expects China to allow the renminbi to float. "There is a fundamental need for China to move to a flexible exchange rate to better equilibrate the growing flows of foreign trade and investment and to regain control over monetary policy, said Mr. Subbaraman. "We judge that the transition will start in a matter of quarters, not years."
Taiwan's export sector is very competitive because of an undervalued currency and a well-established platform into China. "Short term interest rates have spurred a strong pick up in consumer credit which in turn is helping to revive the property market," said Mr. Subbaraman who forecast GDP growth of 5.0 percent in 2005. "The two big risks to Taiwan are Taipei-Beijing relations, and an unchecked property boom."
Incomes in Korea are growing and savings are being rebuilt so households
should begin spending again; 2005 GDP growth is forecast at 4.9 percent.
"Korea's fundamentals are relatively sound and its macro policies are
being used as a stimulus," said Mr. Subbaraman.
"The current economic gloom will lift in 2005."
Ethan Harris gave his prognosis for the US economy: Benign growth and
inflation is likely, but the risk of a "dollar crisis" is significant.
In 2005, the US economy should begin to come to terms with its imbalances in trade, savings, home prices, and government finances.
"Investors have learned to ignore warnings of rising imbalances, but
this high-wire act could become more interesting in 2005," said Mr. Harris. "A dollar crisis could occur if investors pull out of the US markets quickly, and if the major central banks don't stem the dollar's decline."
In the euro area, with the "troublingly" strong euro, the Firm expects
2005 growth to disappoint expectations yet again said Michael Dicks. "It is tempting to conclude that it is a dull continent to watch. But it is much more interesting viewed from the perspective of the official interest rates as even the direction of policy is uncertain," Mr. Dicks added.
Copies of the presentations are available to the media by contacting
Aziam Burson - Marsteller at 02-252-9871 or by email at [email protected].
Lehman Brothers (ticker symbol NYSE: LEH), an innovator in global finance, serves the financial needs of corporations, governments and municipalities, institutional clients, and high-net-worth individuals worldwide. Founded in 1850, Lehman Brothers maintains leadership positions in equity and fixed income sales, trading and research, investment banking, private equity, asset management and private client services. The Firm is headquartered in New York, London, and Tokyo and operates in a network of offices around the world. For further information about Lehman brothers' services, products, and recruitment
opportunities, visit our Web site at www.lehman.com. End.