Domestic demand will drive India, Australia, China Korea: Merrill Lynch

Sudhir Shetty

Mumbai, Nov 19: India is expected to navigate through the ongoing slump along with Australia, China and Korea on the back of broad macroeconomic domestic demand stories, relative isolation from exports. Fiscal stimulus, coupled with monetary easing will help these countries to grow in the next few quarters, said a study.

Merrill Lynch in its November issue on ‘Global Economic Trends’ said the recovery in Asia will be gradual, but not immediate and the recovery is unlikely until the second half of calendar year 2002.

However, US and the global economies that are currently under recession, are expected to grow above potential by this time next year due to massive monetary and fiscal stimulus, coupled with lower energy prices which will provide the necessary catalyst to re-invigorate the global economy.

“Just as the global economy experienced a synchronised slowdown in 2001, it should also experience a synchronised uplift in 2003,” said the report.

Further, the report said, in Asia, excluding Japan, there is also a possibility of liquidity-driven rally without any improvement in fundamentals, due to falling deposit rates. However, Merrill Lynch cautioned that liquidity alone would not hold up prices beyond what relative valuations imply, an upturn in earnings and profits is needed to sustain the rally and it is not yet visible at present.

Merrill Lynch expects a vigorous recovery in the near term. The reason for fast recovery are due to following four reasons.

First, Central banks across the globe have eased interest rates, with US Federal Reserve cutting rates aggressively by 450 bps this year and the rest of the world following it, Merrill Lynch expects interest rates to come down by a further 50 bps by spring 2002, which in line will gradually improve the company’s balance sheet.

Second, energy cost which has plunged and is likely to stay weak, is going to convert into a lot of saving for consumers, along with benefits to businesses; low energy costs will relax margin pressures and as business picks up next year, profit margins will continue to improve providing the catalyst needed to revive capital expenditures.
Third, business inventories have been falling since the beginning of the year in both the US and Euroland, whereas inventory levels in Japan have been depleting for nearly three years now and aggressive inventory liquidation sets the stage for a sharp rise in industrial production.

Lastly, massive fiscal stimulus in the US should stimulate demand — tax cut, increased government spending in the US will be a major catalyst to global growth.