Merrill Lynch Research Expects Global Economy to Rebalance in 2008

Global economy to remain resilient to a slowdown in U.S. growth
NEW YORK & LONDON--(Business Wire)--A new report by Merrill Lynch (MER) Global Research expects the
global economy to remain resistant to a slowdown in U.S. growth.
However, Merrill Lynch economists and strategists believe that whereas
2007 was a year of continuing trends, 2008 will likely be a year of
economic inflection points with the rate of GDP growth rapidly
changing in many countries. In the report "2008: The Global Macro Year
Ahead," Merrill Lynch has identified the following three significant
cross-regional themes for 2008:

1. Global imbalances are unwinding; therefore, export-oriented
companies are likely to outperform in the U.S., and
domestically-oriented companies elsewhere.

2. There are risks and limits arising from decoupling that need to
be monitored.

3. 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," said 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%.

Global economy to rebalance in 2008

The rebalancing of the global economy is one of three main calls
for 2008 from Merrill Lynch. 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. This 'rebalances' the growth within
countries. 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. 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. Also contributing
to the rebalancing is the continued weakness of the dollar. Merrill
Lynch's trading conditions will favor two groups - U.S. corporations
focusing on exports, and non-U.S. companies focusing on their domestic
markets.

Risks and limits arising from decoupling need to be monitored

In the second call, Merrill Lynch argues that investors should
monitor risks and limits rising from the continued trend of the U.S.
and world economies decoupling. While many investors are asking
whether a severe U.S. downturn could prompt a world slowdown, Merrill
Lynch focuses on the exact opposite: which risks might arise from the
continued boom in the rest of the world relative to the U.S.? 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.

Investment in Sovereign Wealth Funds continues to grow

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

Recession ahead for US consumer

According to the Merrill Lynch report, export-led companies are
the silver lining for the U.S. economy.

"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," said David Rosenberg,
Merrill Lynch chief North American economist.

Merrill Lynch 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. Latin America faces another year
of solid and less volatile growth. However, the region faces
challenges from less favorable U.S. market conditions and from high
inflation that will limit scope to stimulate growth through rate cuts.

Japan's economic cycle could bottom in late 2008; liquidity
abundant in Asia

Merrill Lynch 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. Job losses
have already resulted from lower profits at smaller companies.

Liquidity is abundant in the rest of Asia, but constraints on
economic resources are drawing near, with upside risks to inflation,
domestic asset prices, or both.

"Looking into 2008, we think the macro backdrop remains positive
for Asian stocks and especially currencies--for us, a multi-year
standing call," said TJ Bond, Merrill Lynch chief Asia Pacific
economist.

Fundamentals to underpin Eurozone growth

"Growth in the Eurozone will slow but remain solid in 2008," said
Klaus Bader, Merrill Lynch Chief Europe economist. Merrill Lynch
believes that the strong currency, high oil prices and credit turmoil
will impede faster growth. However, according to the report, strong
fundamentals, including an absence of imbalances, and supportive
monetary and fiscal policies underpin the region's strength. U.K.
growth is expected to slow significantly, while Switzerland's
dependence on the financial sector counts against it.

Growth in emerging EMEA will be strong in 2008, but with large
variations from country to country. Uniting the entire region is the
risk of higher inflation which could prompt revaluations of certain
currencies. In the Gulf, fiscal spending should surge as the region
starts spending windfall proceeds from the high oil price.

Oil price to spike before falling; dollar to recover against G10
currencies

Merrill Lynch believes that oil prices could spike further before
Emerging Market governments move to reduce demand or OPEC moves to
increase supply. Francisco Blanch, Merrill Lynch head of Commodities
Research, points out 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.

Merrill Lynch expects the 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.

Investment implications

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.

Merrill Lynch Global Research has consistently achieved high
rankings for its equity and fixed income research in numerous regional
and global investor surveys, such as Institutional Investor, The Wall
Street Journal, LatinFinance, Asiamoney, Euromoney, Extel and Reuters.

Merrill Lynch is one of the world's leading wealth management,
capital markets and advisory companies, with offices in 38 countries
and territories and total client assets of approximately US$1.8
trillion. As an investment bank, it is a leading global trader and
underwriter of securities and derivatives across a broad range of
asset classes and serves as a strategic advisor to corporations,
governments, institutions and individuals worldwide. Merrill Lynch
owns approximately half of BlackRock, one of the world's largest
publicly traded investment management companies, with more than US$1
trillion in assets under management. For more information on Merrill
Lynch, please visit www.ml.com.

Merrill Lynch
Research Communications:
New York
Susan McCabe Walley, +1-212-449-0389
susan_mccabe@ml.com
or
London
Tomos Rhys Edwards, +44 (0)20-7995-2763
tomos_edwards@ml.com

Copyright Business Wire 2007