The Hindu Business Line : ‘US economy will bounce back, $ will rise’

Chennai, Jan. 11 Come second quarter of calender 2008, the US economy will bounce back and the US dollar will appreciate, predicts Mr Markus Schomer, Managing Director, Global Economic Strategist, AIG Investments, New York.

At a press conference of AIG here, Mr Schomer observed that the fears that the US economy would slowdown were essentially founded on the effect of the problems with the sub-prime crisis and the negative growth in the US housing sector.

However, the contribution of the residential housing sector to the US economy is too small — just 0.25 per cent — to make any dent in the whole economy. On the other hand, there are “offsets” in terms of booming industrial and public construction industry, Mr Schomer said.

According to him, US exports will increase powered by “tailwinds” of a weak dollar resulting in increased economic activity in the US. Further, while US companies are making losses in the domestic market, their overseas operations are profitable, providing funds for expansion.

Above all, the US Federal Reserve is expected to cut interest rates again. Mr Schomer said he expected a 50 basis point cut this month. The rate cuts are happening despite inflation being above the target, which signals that the Fed is biased towards growth. “There has never been a recession in the US when the Fed cut rates,” Mr Schomer said.

He also said he expected oil prices to drop to around $85 a barrel by summer.

All this is good for emerging economies such as India, he said at the press conference that was held to announce the launch of a new mutual fund by AIG Investments. The open-ended AIG Infrastructure and Economic Reform Fund proposes to invest mainly in Indian infrastructure companies. Units open for sale from January 10 at a price of Rs 10 a piece plus “applicable entry load”.

Asked if an economic slowdown in the US might not help developing countries such as India, but bringing down commodity prices and making imports cheaper, Mr Schomer said he did not believe so. He noted that the US was not a major consumer of commodities and a slowdown in the country would not lead to a downtrend in commodity prices.