Merrill Lynch predicts the unwinding of global imbalances in 2009, and that along with the weakness in economic growth, oil prices and the U.S. dollar are also expected lower.

Global growth is projected to fall to its lowest level since 1982, before rebounding in 2010, the firm says. Merrill Lynch forecasts global growth of 1.3% in 2009, down from 3.2% in 2008, rising to 3.1% the next year. Even this level of growth would be half a percentage point lower than the average of the past four years, it says.

“We are witnessing an end to global imbalances as U.S. consumers adjust their habits and emerging economies turn inward,” said Alex Patelis, head of international economics at Merrill Lynch. “Japan, emerging Asia and Latin America will be the least vulnerable to this shift, while EMEA and the U.S. will be the most vulnerable.”

In the long run, emerging markets will rely less on Anglo-Saxon consumption, Merrill Lynch says. In China especially, it expects lower interest rates and higher government spending to stimulate domestic demand.

Leveraged countries such as Australia, Switzerland, Korea, Hungary and the euro area are among the most vulnerable economies. Less leveraged countries, such as Nigeria, Mexico and the Philippines, are the least vulnerable, it says. Since developed economies are contracting, emerging markets are on course to deliver more than 100% of global growth, it says.

In Asia, Merrill Lynch predicts Japan can narrowly avoid recession. “The combination of lower commodity prices and a stronger yen should act as an indirect tax cut for the Japanese economy,” said Masayuki Kichikawa, Japan economist at Merrill Lynch.

At the same time, an aggressive package of expansionary policies should limit the slowdown in Chinese growth. “We think China’s fiscal response will prove effective,” said T.J. Bond, Asia Pacific economist (ex-Japan) at Merrill Lynch. “By contrast, smaller, open economies in Asia are more vulnerable.”

A full blown recession is unfolding in the euro area. “In the euro area we believe that export growth is about to collapse and that the credit crisis will limit investment,” said Klaus Baader, chief Europe economist at Merrill Lynch. “Consumption should benefit from lower oil prices, however.”

With demand vanishing across all key oil consuming regions, Merrill Lynch is lowering its crude oil price forecast to US$50 per barrel for 2009. “The key question is ‘how low can oil go?’” said Francisco Blanch, head of global commodities research at Merrill Lynch. “The major downside risk would be a weaker than expected Chinese economy. But in our opinion, oil prices should reach a trough by early in the second quarter.”

Merrill Lynch expects the U.S. dollar to first strengthen and then weaken as risk aversion subsides. “Changing habits of consumers around the world will be the principal force behind currency movement in 2009,” said Daniel Tenengauzer, head of global currency strategy at Merrill Lynch. “Currency values will reflect global rebalancing, lower spending and depleted risk appetite.”

Global rate cuts are expected to fall significantly further. Rates have fallen by more than 0.8% so far and could fall by a similar amount again, it predicts. Fiscal stimulus packages will continue now that the orthodoxy of fiscal discipline has been abandoned.

Past recessions suggest that growth will rebound in the first half of 2009 as stimulus policies take effect, it says. Although it adds that policy constraints could temper that recovery before the “all clear” emerges, most likely in mid-2010.

IE