U.S. economy to recover strongly next year

The U.S. economy is expected to have a stronger recovery, and the Fed's tapering on the quantitative easing should be slow and friendly to the markets, an economist at Merrill Lynch told Xinhua on Monday in an exclusive interview.

The recovery in the housing market of U.S. has been a strong signal of getting close to a stronger growth, according to Ethan Harris, the co-head of Global Economics Research at BofA Merrill Lynch Global Research. As the central of economy, he said, housing market is the key to the household balance sheets, the construction industry and the banking industry.

Harris said, the Fed's zero interest rate policy and quantitative easing has been healing many sectors including the housing sector. People had been running away from the U.S. housing market for a high level of foreclosure and the dropping home prices.

"In the last two years, we are cleaning out about 2/3 of the foreclosures and housing market become to operate normally again," Harris said, "the market has a lot of momentum, we think the housing market will continue to recover even with higher mortgage rates."

The next year would be the first year of solid growth in this recovery, according to Harris. "it's important to understand that the U.S. had a significant healing from the crisis," he said.

Since the easing policy has helped the banks to be more profitable and the companies to have much stronger balance sheets, Harris said, the U.S. economy was expected to move into 3 or 3.5% growth despite that the market is still in the paranoid feeling of the fiscal shock.

With regard to the withdrawal of quantitative easing, Harris said, he agreed with Fed's strategy of a slow quit. "I think the action is going to be even slower than they are saying," he said, "we are still stuck in the 2% economy right now and the inflation is going to remain stubbornly low."

The market has forecasted a tapering in September in the early days, while Harris said that to him, due to lots of uncertainties, such as the fiscal debate in Washington and the debates over Syria as well as the new Fed's Chairman, September is not the right month to make a policy change.

"If you look at the data in recent months, here's an economy that is particularly sensitive to interest rates and that actually shows some weaknesses lately," Harris said, "the Fed was more likely to wait until December to take action."

Talking about the large amount of capital which has fled the emerging markets at the start of the year as the U.S. signaled that the era of easy money would be ending, Harris said that it's a panic in the markets and Fed's slower action and a foreseeable better U.S. growth can be the way to settle them down.

The emerging markets were particular vulnerable for the tapering, especially with those countries that have big external deficits and with aggressive hot money coming in and out, according to Harris. "As soon as the market signs there's a shift, these markets can get hit very hard," he said, "but I think that ultimately, the global economy and the emerging market will do fine with the Fed's exit."

As to the economic concerns over China, Harris said that a hard landing is not likely to happen because the government can calibrate with the reforms and series of anti-corruption actions. The reasonable inflation environment also allows the Chinese government flexibility during economic weakness, he said.

Ethan Harris

Co-head of Global Economics Research at BofA Merrill Lynch Global Research