One on One with Alex Patelis, Head of International Economics at Merrill Lynch
Monday, April 21, 2008
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SUSIE GHARIB: More now on Britain's credit crunch and other issues facing the global economy. Joining us with his analysis, Alex Patelis, head of international economics at Merrill Lynch. Hi Alex.
ALEX PATELIS, HEAD OF INTL. ECONOMICS, MERRILL LYNCH: Hello.
GHARIB: Tell us --
PATELIS: Nice to be here.
GHARIB: Great to have you tonight. Alex, tell us how significant is it that the Bank of England is buying back these mortgage-backed securities? When the Federal Reserve did this in the United States, it was unprecedented.
PATELIS: That's correct. It is unprecedented for the Bank of England as well. It is particularly noteworthy given that the central bank a couple of months ago when the crisis first started, the governor wrote a letter arguing that moral hazards considerations should feature at the top of their agenda. And here we are a couple of months later and they are issuing a very aggressive plan. Of course that all reflects the seriousness of the situation in the UK. We've seen the number of mortgages available to consumers shrink notably. And credit availability has been tightened to a very large degree.
GHARIB: We've seen a lot of the growth forecast, economic forecasts for 2008 being flat. What are your forecasts for growth in both Britain and the euro zone countries?
PATELIS: We are somewhat concerned on the outlook for the UK. The UK is in the group of countries that we label the Anglo Saxon countries that have commonalities of a lot of consumer debt, low savings rate, a lot of dependency on the housing market, that the U.S., the UK, maybe Australia, New Zealand and Canada. And that is where we see a lot of down side growth threat. Now outside those key countries, I would say that the outlook remains relatively positive. In continental Europe and the euro area itself, we are optimistic. We think that the markets themselves are not that important in the financing process. But in addition we don't have too much debt.
GHARIB: We are seeing that inflation is becoming the big concern across the board. Why is inflation becoming such a concern given that most of these countries are experiencing somewhat slowing of economic growth?
PATELIS: That a very good question. Outside of these countries we don't find much slowing, particularly in the emerging market world. We have the economy still growing at a rapid rate. And keep in mind that for many commodities, food and energy, the emerging market countries remain the incremental demand. They are the ones that are demanding additional resources and they are the ones driving up the prices and causing the inflation.
GHARIB: Well, with inflation rising, I guess that rules out any interest rate cuts from the Bank of England and from the European Union.
PATELIS: We think that the Bank of England itself will have to cut rates, not by much, but a couple more times this year. They have their downside risks from housing, their upside risks from inflation. It is a very difficult balance they have to strike. In continental Europe, the European central bank we expected to remain on hold for the foreseeable future. There we have inflation, at a 13 year high in Europe and of course we have no signs yet that the credit crisis is having an effect on money growth. Money growth in Europe is still running at about 11.5 percent year-over-year.
GHARIB: And so this will continue to put pressure on the U.S. dollar pushing the dollar even lower if there are not going to be any interest rate cuts.
PATELIS: Yes. That is correct. And we have seen the downward decline in the dollar. I would highlight that it is particularly risky and particularly risky position against the emerging market currencies. That's because many of the emerging market central banks have actually now raising interest rates or tightening policy. Last week alone we had the big three, China, India and Brazil all tighten policy one way or the other. And so we think that the dollar is most at risk against those emerging market currencies.
GHARIB: All right, but is the silver lining here that with the weak dollar at least for U.S. exports, United States will be able to export more and is there demand for those U.S. products?
PATELIS: Absolutely. The U.S. export sector has really lagged other countries and the U.S. has lost a lot of its competitiveness. This is clearly going to reverse in the years to come. We are already seeing this in a lot of the earnings reports in the S&P 500. We expect this dynamic to continue. The dollar has been weak and that works with a lag. Growth elsewhere outside the United States remains strong. And so we do believe that investors should focus on companies that have good export prospect outside the U.S.
GHARIB: Alex, very interesting information. Thank you so much for coming on our program.
PATELIS: Great pleasure. Thanks for having me.
GHARIB: My guest tonight, Alex Patelis, head of international economics at Merrill Lynch.
