The global economy will remain resistant to a slowdown in U.S. growth, predicts a new report by Merrill Lynch Global Research.

Merrill Lynch economists and strategists believe that 2008 will likely be a year of economic inflection points with the rate of GDP growth rapidly changing in many countries. In the report, it identifies three significant cross-regional themes for 2008: global imbalances are unwinding, therefore, export-oriented companies are likely to outperform in the U.S., and domestically-oriented companies elsewhere; there are risks and limits arising from decoupling that need to be monitored; and, the investment in Sovereign Wealth Funds continues to grow.

“All three calls underscore our optimism that the global economy remains resilient to U.S. economic slowdown,” says Alex Patelis, head of international economics at Merrill Lynch. The report forecasts global growth ex-U.S. moderating to 5.6% next year from 6.0%, even as the U.S. slows from 2.2% to 1.4%.

Imbalances in the global economy, stemming from historic dependence on the U.S. consumer, have peaked and will unwind throughout the coming year, conclude Merrill Lynch’s economists and strategists. At the heart of this rebalancing, which could last several years, is the growing power of consumers outside the U.S. and the prospect of a consumer recession within the U.S. High levels of personal debt are curtailing spending habits of U.S. consumers, while prospects for domestic demand are strong outside the U.S., it says.

“The U.S. is on the precipice of its first consumer recession since 1991, which was the last time the market suffered from a confluence of high energy prices, weakening employment conditions, real estate deflation and tightening credit,” says David Rosenberg, Merrill Lynch chief North American economist. It expects modest growth to take hold late in 2008, though the U.S. Federal Reserve will need to cut interest rates to 2% by mid-2009 to sustain the recovery.

The firm expects that the Japanese economic cycle could reach a bottom in the second half of 2008, as wages begin to climb again and the Bank of Japan cuts interest rates to stimulate growth. It also predicts that growth in the Eurozone will slow but remain solid in 2008.

Merrill Lynch believes that rebalancing will be the dominant economic theme for the next three to five years. Rebalancing implies that investors should take overweight positions on export-oriented companies in the U.S. and domestically-oriented companies elsewhere, it adds.

Additionally, Merrill Lynch also argues that investors should monitor risks and limits rising from the continued trend of the U.S. and world economies decoupling. The report notes that these risks include the possibility of a U.S. dollar crisis, inflation, tightening (via higher rates, stronger currencies, capital controls or quantitative measures) or the negative side-effects of inflation. Although these issues could emerge in specific countries in 2008, Merrill Lynch does not think they will be binding for the global economy as a whole.

Finally, Merrill Lynch believes that Sovereign Wealth Funds, boosted by rapidly growing central bank reserves, will play an important role in boosting global liquidity. It expects SWFs to double or triple their share of riskier global assets by 2010, and grow to a potential US$8 trillion by 2011.

Merrill Lynch believes that oil prices could spike further before emerging market governments move to reduce demand or OPEC moves to increase supply. It says that increased production and potentially slower growth should push prices below US$70/bbl by the final quarter of the year. Prices of precious metals should continue to rise, but the outlook for industrial metals, except nickel, is negative.

It expects the US dollar to fall further against the euro and yen before starting to recover against G10 currencies. More heavily-managed currencies, such as those in Asia, Middle East and Russia, will continue to appreciate.

Under these scenarios, Merrill Lynch believes that the macro backdrop remains positive for equities versus bonds. Merrill Lynch recommends that rising economic volatility, declining correlations and higher short rates require shifting some money from stocks to cash, purchasing protection, carefully managing risk, and ensuring a diversified portfolio.