SAXO BANK tips new mood of “forced savings” in a tougher 2008

US and Western consumers will have to stop living beyond their means and start saving, for the first time in decades, as rising inflation in 2008 sees the cost of living soar, applying a break on consumption and turning GDP growth negative five quarters after house prices peak.

“For the first time since the seventies we are seeing the re-emergence of “stagflation,” which means we are seeing a reduction in risk-appetite, rising inflation and slowing GDP growth. Central Banks are no longer in control of inflation and have kept interest rates artificially low for too long. Now, they have finally taken notice and will need to raise rates in 2008 or risk a decade of high inflation,” says David Karsbøl, Saxo Bank’s head of strategy.

With that in mind, says Karsbøl, GDP growth and consumption will not return to ‘normal’ until 2012, pushing real long-term interest rates to creep up and unemployment to climb between 80-100% higher than in 2007. The US will be the first country to suffer, with GDP growth tipped to turn negative from the second or third quarter of 2008. But despite some dire warnings for the US outlook, Saxo Bank, renowned as an online FX trading bank, predict the troubled US Dollar will stage a comeback against an “overvalued” Euro in 2008.

“The Euro Dollar (EURUSD) will retreat from its current level, to trade at 1.3400 by Q4 2008,” says Karsbøl.

Europe is forecast to undergo at least one interest rate rise, with the European Central Bank hiking rates to 4.25%, predicts the Bank. While Karsbøl says all countries that have benefited from a housing boom stand to suffer from the unravelling credit crisis and a drop in house prices, the UK and US are the most vulnerable.

“The UK will be very vulnerable throughout 2008 as we expect housing to slow and the effect of pared back bank bonuses start to play out,” he says. Karsbøl adds, “We are bearish on the Pound, which will be a volatile currency mover throughout the year and weaken to trade at 1.90 against the US Dollar in the second, and again in the fourth quarter.”

The China bubble that has been the big story since the late 90’s will finally and significantly burst in 2008, with the Shanghai Composite index plummeting a colossal 40% to target 2900 by the year’s end, according to Karsbøl’s predictions. One country Saxo Bank tips for a surprise comeback is Japan, which may become the contrarian investment of 2008 after recently undergoing financial sector reforms, seeing an increase in foreign capital in-flow and a rally in home prices and personal consumption.

“We believe Japan could stage a comeback in 2008, but we won’t buy the Nikkei 225 until it hits 352,” says Karsbøl.

Energy and agricultural sectors are tipped to be the strong performers through 2008, with oil predicted to push $175 p/b and wheat, corn and livestock prices rallying on the back of poor supply, higher demand for bio-ethanol products and rising meat demand from Chinese consumers.

Saxo Bank’s 2008 Global Economic Outlook (summary)

Outlooook 2008 Year of recession (full report)

About Saxo Bank A/S

Saxo Bank A/S is a modern investment bank specializing in online investments in international Capital Markets. Saxo Bank enables clients to trade currencies, shares, CFDs, futures, options and other derivatives, as well as providing portfolio management via our online trading platform, SaxoTrader. SaxoTrader has been developed by Saxo Bank and is available to today's investor directly through Saxo Bank or through one of our global partnerships, where it forms an integral part of their infrastructure. One of Saxo Bank's significant areas of business is White Labelling. This involves the bank’s online trading platform being customized and branded for other financial institutions and brokers. Saxo Bank has more than 100 White Label Partners and boasts thousands of clients in over 177 countries. The bank's website www.saxobank.com receives approximately 65,000 visitors every day. Saxo Bank currently employs almost 1,200 employees from 58 different countries.

Saxo Bank has its headquarters in Copenhagen, with offices in London, Geneva, Zürich, Singapore and Marbella. It also runs a representative office in Beijing and an IT development centre in St. Petersburg.