The US Federal Reserve will need to slash interest rates three times this year as the housing slump goes from bad to worse and the American consumer begins to buckle, Goldman Sachs has warned.
"Americans have shown a complete lack of self-control. The personal savings rate is at its lowest point ever, and has actually been negative since April 2005.
"We believe that housing will soon become the proverbial 'straw that breaks the camel's back'," said David Kostin, the investment bank's US strategist.
Goldman Sachs said homeowners had treated windfall gains from rising house prices as if they were "recurring income", using home equity withdrawls to subsidize over-stretched lifestyles. This artificial boost to spending has already dropped from 7pc to 4pc of GDP over the last year, and is likely to halve again in 2007.
Mortgage equity withdrawal will fall from 13pc of "discretionary household cash flow" in 2006 to 7pc this year, causing spending power to contract for the first time since the dotcom bust.
The bank predicted in its closely-watched global outlook that the US would stave off recession, notching up growth of 2.1pc in 2007. Interest rates will fall briskly from 5.25pc to 4.5pc by the end of the year.
Jim O'Neill, head of global economic research, said Europe, Japan and above all the emergent 'BRIC' quartet of Brazil, Russia, China, and India would seize the growth baton, giving the world a fifth consecutive year of blistering growth above 4pc - and even a sixth in 2008.
Mr O'Neill said he is watching the bank's Global Leading Indicators (GLI) index "very closely" after it turned negative in December for the first time in four years, but still thinks outlook remains extraordinarily benign.
"People worry too much. What they seem to ignore is that globalized world has been a (positive) shock allowing the growth trend to pick up. If ever there was a good time for the US to slow this is it," he said.
"Miracle of miracles, even Germany is back. They are at last doing something unGerman, which is employing people," he said.
Goldman Sachs expected the 'BRIC' four to grow at 8.5pc this year, helping to soak up global exports and gradually bring America's trade deficit under control. "We're seeing better signs on US trade now that at any time in the last 20 years," said Mr O'Neill.
BRIC demand - and demand from the new 'Non-BRIC eleven' copycats, such as Vietnam - will soon fuel a rebound in crude oil prices, which have tumbled by a third since peaking in May.
"This winter has been extraordinary warm," said Jeffrey Currie, the bank's commodities chief.
"We've had temperatures of 72 degress with flowers blooming in New York. The impact on energy has been enormous," he said.
The bank said El Nino currents may have set off the New Year plunge, but it was speculators who then finished the job with a vengeance. "Everything hit the market at once. We had the perfect storm, but the long-term story is very intact," he said.
Mr Currie said the US oil giant Conoco had come up with "zero" in its latest exploration drive; Russia was in a "stand-off" with western oil firms; Venezuela was threatening "to nationalize the entire energy sector"; and North Sea oil output was falling relentlessly.
"The global market is in very sharp deficit and the investment climate is much more hostile than anything we've seen before," he said. Far from over, the bull market in oil has five or ten years more to run.
No comments:
Post a Comment