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3 RISKY
BUSINESS Global economy faces a dangerous
year By Jephraim P Gundzik
such legislation will increase downward
pressure on the value of the dollar against all
major currencies, particularly the yen.
The dollar is likely to depreciate by at
least 20% against the yen, the Swiss franc, the
euro and the pound in 2007. The dollar will also
depreciate against the currencies of emerging
market commodity exporters. Finally, Beijing will
probably allow the yuan to appreciate about 10%
against the dollar. Rather than political
pressure from Washington,
continued high energy prices and soaring grain
prices will motivate the revaluation of the yuan.
Sliding stock markets Economic
growth in China is likely to slip towards 6% in
2007. Beijing’s enormous fiscal latitude will
ensure that ramped up fiscal spending will
partially offset significant weakness in China’s
US-oriented export sector. Accelerated yuan
revaluation against the dollar will help offset
the inflationary impact of rising energy and grain
prices. Economic growth in Japan will probably
fall below 1.5% in 2007 due to export sector
weakness. In addition to importing all of its
energy needs, Japan relies on imports of US corn
for sustaining domestic meat production. This
reliance on energy and grain imports will
encourage the Bank of Japan to push the yen higher
against the dollar to contain inflation.
Economic growth in Korea should slow
towards 1% in 2007. Growing tensions between
Washington and Pyongyang will undermine private
consumption and investment while much weaker US-
and China-bound exports will slow export sector
growth. Like Japan, Korea is also a major importer
of US corn. Won appreciation against the dollar
will be limited by growing security concerns. As a
result, inflation will accelerate, further
undermining the won.
Economic growth in
South and Southeast Asia will also slow sharply.
In addition to slowing US economic growth,
increasing global geopolitical instability will
lead to more frequent and violent terrorist
attacks, especially in India, Indonesia, the
Philippines and Thailand. These attacks will
produce further political and social instability.
Foreign capital flight, driven by much slower than
expected economic growth and a sharp correction in
US equities, will make these countries Asia’s
worst investment performers in 2007.
Economic growth in Latin America will also
suffer from the US downturn in 2007. Mexico, where
political and social instability are expected to
increase substantially while US-bound exports
grind to a halt, should follow the US into
recession. Capital flight will weaken the peso,
preventing exchange rate appreciation from
offsetting the impact of sharply higher corn
prices on the domestic food industry.
Economic growth in Brazil, Colombia and
Peru will also slow sharply in 2007. Brazil’s
export sector will benefit from soaring grain
prices, while Colombia and Peru will suffer from
the same. Equities in all four countries will
follow US equities downward. Economic growth in
Venezuela, Ecuador and Argentina will benefit from
soaring commodity prices. This will not prevent
equity market correction, but should underpin
exchange rates in all three countries.
With the notable exception of Turkey,
economic growth in Europe should suffer the least
from slowing US economic growth in 2007. Monetary
policy in the EU will tighten further,
underpinning currency appreciation. Economic
interdependence between EU members will insulate
the region somewhat from slowing economic growth
in the rest of the world. Russia will benefit from
rising commodity prices. Despite more promising
economic prospects, equities across Europe will
follow US equities in a sharp correction.
Bond markets around the world are likely
to be very volatile in 2007. Rapidly changing
economic growth and inflation expectations will
produce wide price swings. This volatility will be
led by US bonds, which will see falling yields in
early 2007 be replaced by rising yields in
mid-2007 as inflation increases and foreign
capital flight accelerates. Spreads on emerging
market bonds will widen with falling equity
markets around the world. Commodities, including
energy, grains and precious metals, will probably
perform much better than traditional investment
assets as both investors and central banks speed
diversification.
Jephraim P
Gundzik is president of Condor Advisers.
Condor Advisers provides investment risk analysis
to individuals and institutions worldwide. Visit
www.condoradvisers.com for more information.
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