Blog: Dave LeggettJD Power forecast conference

Dave Leggett | 25 April 2005

That JD Power forecast conference I attended on Friday at the Park Lane Hotel on Piccadilly (London) was informative and also, I must admit, quite a bit of fun. Nice venue (we were in the hotel ballroom, very art deco). Lots of familiar faces to catch up with, as usual, and the post-conference cocktails session in the hotel bar was a very jolly affair that stretched into the evening (thanking you McGraw-Hill).

Kicking off the programme in the morning was a presentation on the global economy from John Walker of OEF that was quite uplifting if you want to hear good news. Things are not going too bad for the world economy apparently, bar one or two risks.

In particular, he had reasonably upbeat assessment of the state of the US economy.
Yes, there is concern about consumer indebtedness, but Mr Walker pointed out that the value of consumers’ assets – principally housing – risen strongly too. Without a big fall in stocks or house prices, the consumer should continue to be largely okay, he said. And a big investment surge will be driving the US economy in the next few years, reflecting better corporate profitability and in spite of higher interest rates.

On the US current account deficit and the dollar, he said the big problem is Asia. There has been massive intervention by Asian central banks to keep their currencies weak against the dollar (in part because they want to stay competitive versus each other). Also inflows into the US bond market from Asians (buying US corporate and Treasury debt) have been unprecedented in recent years and have effectively funded the current account deficit.

But can these things continue? Asian central banks may well carry on in order to keep their currencies competitive, but there is a risk that private sector Asians who have been buying US bonds at unprecedented rates may wind that activity down. Currencies and trade deficits would then be affected and the danger of big ‘non-orderly’ shifts increases. The risk here is attached to the sheer scale of the US deficit and what could happen to the balance if a part of the jigsaw is removed.

But Mr Walker’s central forecast was for a gradual appreciation of the dollar and a reduction in the size of the US current account deficit. Anyway, that US trade deficit with Asia and the way it has been funded struck me as the main issue for the global economy over the next two years.

And don’t go worrying too much about the price of oil. In real terms it is still way under where it was in the last oil shock and economic activity is now less transport intensive anyway (bigger role for services sector). Walker said that the oil price will stay high for the next 2/3 years, but as more supply comes on stream towards the end of the decade the price will decline a little.

Below is a link to a news item I knocked up looking at some of what was said at the conference about Europe. That rather large excess capacity number is a little bit of a shocker. And many manufacturers are adding capacity rather than taking it out. No wonder they struggle to make money. But maybe the position will be a little different by 2010 with some plants set to go. Setubal (Portugal, VW) and Trollhattan (GM, Saab, Sweden) perhaps have question-marks next to them. And perhaps Fiat will be forced to do more in Italy. But PSA's British plant at Ryton (206 only) is being increasingly seen as a racing certainty for closure.


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