The US may come out ahead in 2011 as policy makers from Federal Reserve Chairman Ben S Bernanke to Chinese Premier Wen Jiabao jockey for advantage in the world economy.
US growth is accelerating as the year ends, with economists, consumers and companies such as General Electric Co becoming more confident about next year’s outlook after President Barack Obama struck a tax-cut deal with Republicans this month. Europe, meantime, is stuck in a sovereign-debt morass, while China and other emerging countries are struggling to cap an economically costly run-up in inflation.
“The new, new, new normal is for the US to be looking in pretty good shape,” said Jim O’Neill, the London-based chairman of Goldman Sachs Asset Management.
That’s prompting investors to take another look at the country, O’Neill, who helps manage $823 billion, said last week in a radio interview on “Bloomberg Surveillance” with Tom Keene. It’s “raising issues about the whole allocation of capital between so-called emerging markets and the US,” said O’Neill, who popularised investing in developing nations by coining the BRIC moniker for Brazil, Russia, India and China.
Robert Doll, chief equity strategist at BlackRock Inc in New York, agrees. He said the improving economy and tax-cut compromise Congress passed last week strengthen the case for investors being overweight US shares in their portfolios.
“The US will continue to outperform the rest of the developed world” and will “probably do pretty well versus most emerging markets as well,” said Doll, who helps manage about $3.4 trillion. He sees the Standard & Poor’s 500 Index climbing to the “neighbourhood of 1,350” by the end of 2011, compared with 1,243.91 at 4 pm in New York on December 17.
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The Standard and Poor’s 500 Index of US stocks has risen 12 per cent this year, compared with declines in emerging markets such as China and Brazil and exceeding gains in the MSCI World Index, which tracks developed-nation equities.
“The US economy unquestionably has some momentum,” former Fed Chairman Alan Greenspan said. “The unemployment rate should start coming down next year.” Joblessness stood at 9.8 per cent in November, a seven-month high.
US chief executives polled in the fourth quarter by the Washington-based Business Roundtable were the most optimistic they’ve been in almost five years. Jeffrey Immelt, chief executive officer of Fairfield, Connecticut-based GE, called Obama’s tax cut and his December 15 meeting with corporate leaders “real positives.”
Even long-time bears on the US economy are becoming more upbeat. Goldman Sachs Group Inc chief US economist Jan Hatzius lifted his 2011 forecast to 3.4 per cent from 2 per cent last month to take account of the tax-cut package and a recent spate of stronger-than-expected economic statistics.
Mohamed El-Erian, chief executive officer of Pacific Investment Management Co in Newport Beach, California, said the “massive’ stimulus that US policy makers are pumping into the economy will help it expand by 3 per cent to 3.5 per cent in the fourth quarter of next year from the same period this year. He previously saw growth of 2 per cent to 2.5 per cent.
El-Erian, a leading proponent of the “new normal” economy paradigm of sluggish growth for a post-crisis US, remains skeptical that the elevated rate can be sustained beyond 2011 unless the country also acts to enhance its long-term competitiveness and reduce its medium-term budget deficit.
There are limits to how much fiscal and monetary stimulus can achieve, he cautioned, pointing in particular to the rise in long-term interest rates since Obama unveiled his $858 billion tax-cut compromise with Republicans. The yield on the Treasury’s 10-year note was 3.33 per cent at 5:29 pm December 17 in New York, according to BGCantor Market Data, compared with 2.92 per cent on December 6.
“A bond-market crisis is likely unless we do something about the budget deficit,” Greenspan said.
Pimco sees the euro area expanding by just 0.5 per cent to 0.75 per cent next year, while the emerging world will slow as its leaders fight inflation, El-Erian said. The firm, which manages the world’s largest bond fund, forecasts combined growth for China, India, Brazil and Mexico will decelerate to between 6.5 per cent and 7.5 per cent in 2011, from 8 per cent to 9 per cent this year.
The outlook for 2011 is taking shape as governments and central banks increasingly shift away from the united approach they used to tackle the recent recession and begin to work in their own self-interest, with one country’s gains potentially causing another’s losses.
Obama’s latest round of fiscal stimulus came after a mid- year slowdown, partly caused by surging imports, spooked the Fed into embarking upon its second round of so-called quantitative easing with a plan to buy $600 billion of long-term Treasury securities through June 2011.
The resulting flood of money is threatening to overheat already buoyant emerging markets, even as export-driven economies such as China resist letting their currencies rise in response. Their reluctance is stoking demand for commodities and boosting the cost of energy worldwide, including in the US.