2007, a good year for the global economy

Last year, the growth rate of the global economy amounted to 5%. After this excellent year, this year is going to be a good year. This is what Lex Hoogduin (Chief Economist) states in a Robeco Web-TV broadcast in which he, together with Edith Siermann (Chief Investment Officer Fixed Income) and Mark Glazener (fund manager of the Robeco fond) gives his views on the economic developments in 2007.

 

Last year, the growth rate of the global economy amounted to 5%. After this excellent year, this year is going to be a good year. Growth is slowing down somewhat because the US economy has downshifted into a lower gear in comparison to what we had become accustomed to in recent years. The rest of the world will be less affected by the headwinds coming from the US than was the case previously. This is because the slowdown in economic growth in the US is mainly due to the slump in the housing market and not to a global factor. Emerging economies will therefore continue to move ahead in the global economy. Growth in the euro-zone will slowdown somewhat to just above 2%. Japan should be able to achieve about the same level of growth, although the situation there is more uncertain, because Japanese consumers continue to refrain from spending.

 

The American central bank (the Fed) will maintain interest rates at the present level and will only proceed to cut interest rates if inflation drops convincingly below 2% and growth remains below the trend growth of approximately 3%.   The ECB will increase interest rates during the first half of this year to 3.75% - 4% and will then adopt a wait-and-see approach. In both the US and the euro-zone, the yield curve will be flat at the end of the year and inflation risks will gradually decrease. The Japanese central bank still has a long way to go to arrive at a normal interest rate, which amounts to around 3%. This year, the Japanese central bank will only gradually move in this direction. Bond yields will increase in line with short-term interest rates. This year as well, there will be hardly any inflation in Japan. This year, the dollar will also remain a vulnerable currency, with a narrowing interest-rate difference in favor of the US and a balance of payments current account that is still not showing a convincing improvement.

 

The most important risks in the event of good prospects are mainly on the downside. In this context, the low prices that investors demand for running risks are conspicuous. Risk premiums are historically low. This will not remain so. 2007, could be the year in which a correction may take place in the direction of more normal levels.

 

We expect that 2007 will be an average to good year for equities. Growth will continue, albeit at a lower level. Bond yields could increase slightly, however, this will not amount to that much. The valuation of equities lies below the long-term average. A clear matter of concern is the earnings development. In many sectors (such as raw materials and energy), costs are increasing, whereas the prices of raw materials are ready for a pause. The factor labor could demand a larger piece of the pie. This will have a stabilizing effect on earnings, after years of growth. Earnings will then grow at the most at the same rate as nominal GDP growth and that will imply a slowdown in comparison to last year.

 

Historically, risk premiums for fixed-income investments are at a very low level, actually too low. Products and funds, whereby the fund manager can profit from a decline in prices in the interest-rate market by taking the right position, are therefore to be preferred. The expectations with regard to the development of interest rates and inflation compel the investor in 2007 to focus on the short term.

 

Robeco Web TV is a monthly discussion program in which guests discuss topical financial and economic subjects. One of our permanent participants is Lex Hoogduin, Robeco's Chief Economist. In addition to Lex Hoogduin, Robeco fund managers and other financial specialists are invited to participate. Robeco Web TV can be viewed on www.robeco.nl and www.robeco.com Previous broadcasts of Robeco Web TV focused on, among other issues, interest-rate developments, sustainability, private equity, and Europe.

 

Robeco provides discretionary asset-management products and services, as well as a complete range of mutual funds to a large number of institutional and retail clients worldwide. Robeco's product range encompasses fixed-income and equity investments, as well as balanced accounts, money-market funds and alternative investments.

 

Robeco distributes its funds for the retail market directly, and through other financial institutions. Several of its mutual funds, including the flagship Robeco N.V., are listed on major European stock exchanges such as Amsterdam, Paris, Frankfurt and London.

 

Robeco services its clients not only from its head office in Rotterdam but also from its European offices in Belgium, France, Germany, Spain and Switzerland. In the United States, Robeco has offices in New York (NY), Boston (MA), Greenbrae (CA), San Francisco (CA), Los Angeles (CA) and Toledo (Harbor Capital Advisors). Robeco also has an office in Bahrain and an office in Japan.

 

Robeco is the center for asset management within the Rabobank Group and has full operational independence. The combination of the highest credit ratings from the major international rating agencies and the highest Sustainability Cluster Score within the banking sector reflects the high added value Rabobank has always offered its investors, members, clients and employees.

 

 

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