The world economy should remain spinning steadily this year, with an expected increase in consumer demand in Asia set to balance out possible wobbles from a likely slowdown in the U.S. economy, says a forecast from U.S.-based investment house Merrill Lynch.
China and India will continue to lead last year's good-news story for the economies of the Pacific Rim, Merrill Lynch said, with Japan -- having lately shown signs of a recovery -- to provide further support.
"Consumption expenditure in the Pacific Rim will be enough to weather a slow landing of the U.S. economy," Merrill Lynch chief economist Jesper Koll said in a media briefing on the report Tuesday.
"Japan, in particular, will be the main source of demand for Asia."
Merrill Lynch sees Japan's economy recovering from last year's high levels of savings, bad loans in the banking sector and unemployment, picking up on more growth from domestic demand this year with the Japanese central bank being in no rush to raise rates and the government ruling out an early hike in consumer taxes.
Japan is expected to experience slightly higher growth of 2.2 percent in 2007 from 2.1 percent last year, helping compensate for the effects of the U.S. growing slower at 1.7 percent (from 3.2 percent) due to the recent housing market downturn.
This will result in the global economy still being able to grow by an aggregate of no less than 4.5 percent (from 5.2 percent), and the Asian region at 7.8 percent (8.7 percent).
The region's expected growth should be strong enough to boost inflationary pressures in the second half of this year, which, coupled with strong external surpluses, should support continued policy tightening through currency appreciation and persistent central bank rate hikes, Merrill Lynch global forex strategist Alex Patelis said.
All this will in turn help spread out more evenly to emerging markets the more than US$800 billion of capital flowing each year into the U.S., thus easing out the risk of global imbalances in the world economy.
Specifically for Indonesia, Merrill Lynch sees this as an opportunity to continue attracting investors to the country's financial markets.
"Investors are looking at new frontiers. There is a race going on between emerging markets to attract investors," Koll said. "Now is a good opportunity for the government to put in place good policies to support this."
Merrill Lynch sees Indonesia's central bank being able to continue cutting rates to 9 percent by the year's end from 9.5 percent at present.
With inflation standing at some 6.6 percent now, the resulting real interest rate may not be "historically attractive, but still more attractive if compared to other countries in the region," Patelis said.
The overweight rupiah also remains among the investment firm's favorite currencies in Asia, he added.