The GCC countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE) face the same macroeconomic difficulty that China faces in dealing with their massive balance of payments surpluses. Eventually, in our view, they will need to follow the exchange rate and monetary transformation undertaken by Beijing, and one day adopt a flexible exchange rate regime that will permit the GCC to absorb large swings in the oil prices and allow the GCC countries to devise their own monetary policy – independent from that of the Fed. Since the GCC countries are committed to establishing a monetary union by 2010, it makes sense for such a comprehensive structural transformation to be undertaken after this monetary union is established. However, this does not mean that there will be no changes whatsoever to any part of the exchange rate regimes before 2010. In fact, under certain conditions, small step revaluations – with the dollar pegs retails – remain a risk, particularly for the smaller open economies within the GCC.
[I]Written by Stephen Roach, Head Economist, Morgan Stanley[/I]
[B]Weekly Bank Research Center 01-28-08[/B]
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[B]Dollar Peg in Danger for Oil Producing Countries [/B][/B]
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Stephen Roach, Head Economist, Morgan Stanley [/I]
The GCC countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE) face the same macroeconomic difficulty that China faces in dealing with their massive balance of payments surpluses. Eventually, in our view, they will need to follow the exchange rate and monetary transformation undertaken by Beijing, and one day adopt a flexible exchange rate regime that will permit the GCC to absorb large swings in the oil prices and allow the GCC countries to devise their own monetary policy – independent from that of the Fed. Since the GCC countries are committed to establishing a monetary union by 2010, it makes sense for such a comprehensive structural transformation to be undertaken after this monetary union is established. However, this does not mean that there will be no changes whatsoever to any part of the exchange rate regimes before 2010. In fact, under certain conditions, small step revaluations – with the dollar pegs retails – remain a risk, particularly for the smaller open economies within the GCC.
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[B] European Central Bank Rate Cut - Wishful Thinking? [/B]
[/B] [/B] [/B] <em> Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
The past week has been entertaining - at least if one likes major market swings, rumours and arguments. The rollercoaster ride in the markets was followed on Tuesday and Wednesday by rumours that the ECB would follow the lead of the US central bank and ease monetary policy - something supported by the previously wellplaced Spanish Finance Minister, Solbes (former Chairman of ECOFIN, who is in close contact with the EU Commission and the ECB), who has stated that the ECB has discussed a rate cut. However, German central bank chief, Axel Weber, said on Thursday that the market’s speculation about a rate cut could be wishful thinking.
<strong style=""> [B][B][B] [B] US Economy on the Ropes [/B]
[/B] [/B] [/B] [I] Steve Chan, Economist, TD Bank Financial Group [/I]
U.S. economic conditions have deteriorated rapidly in recent weeks. Existing home sales in the U.S. fell dramatically in December (-2.2% m/m), capping the biggest yearly slump (-12.8%) on record in more than a generation. 2007 also recorded the first ever annual decline (-2.8%) in the prices of existing single family homes in at least four decades. With home prices falling steadily and foreclosures likely to climb further amid rising mortgage rate resets, housing shows no sign of bottoming. The seemingly endless descent in the housing market is starting to seep into other sectors and, along with record high energy prices, is weighing on consumer sentiment. Credit conditions continue to tighten due to the massive debt write-downs at financial institutions. This, along with the recent steep slide in global equity markets early in the week, compounded the souring of sentiment. Employment – the last pillar of consumer support – is now giving out, with nonfarm payrolls recording the slowest growth in four years last month, lifting the unemployment rate to a two-year high of 5%. Not surprisingly, the holiday shopping season ended in a Scrooge-like fashion.
<strong style=""> [B][B][B] [B] UK Economy to Avoid Recession in 2008 [/B]
[/B] [/B] [/B] [I] Trevor Williams, Chief Economist at Lloyds TSB Financial Markets [/I]
The UK economy is actually entering 2008 with a lot of momentum, in spite of signs the pace of growth is faltering. Despite worries about imminent recession, growth in the final quarter of 2007 was 0.6% - almost bang in line with the long run average. This is despite the credit crisis, the slowing of house price inflation, oil prices averaging over $90 dollars a barrel in the final quarter of 2007 and a rise to a mid-year peak of 5.75% in interest rates (though cut to 5.5% in December). What are the main factors driving expansion of the economy? Consumer spending remains the key, with growth of over 3% in 2007, helped by rising household wealth effects – stock market and housing, see chart a. Although both of the latter are slowing down - and showing signs of vulnerability - the fact is that in the last few years, they have been supporting a fall in the saving ratio and, by implication, growth in consumer spending. But there is a slowdown in consumer spending underway, with consumer and retail confidence both sharply off their 2007 peaks and wealth effects in retreat, alongside a rise in energy prices and mortgage payments that are sapping real income growth.
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[/B] [/B] [/B] [I] J-Chart [/I]
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