A thought provoking interview with Stephen Roach, chairman of Morgan Stanley Asia by CNBC gave some insight into what the next 18 months may mean for the global economy. Roach sees the recovery as more L shaped than V with considerable gyrations either side of the line over the next 18 months. He feels for the time being the markets are range bound and we can expect positive and negative sentiment to continue to create uncertainty. There will be no quick bounce back.
When pressed on the prospects for Asia, Roach was pretty negative. Don’t expect Asia to be the engine that pulls the global economy out of recession he said. Since the Asia crisis, the emerging economies of Asia have become more reliant on exports than less, moving from 36% of pan regional GDP in 1997/8 to 47% by 2007. Much of those exports are destined for the developed economies of North America and Europe.
So will the US consumer revert to type and start consuming again in the near future? No says Roach, he believes there has been a sea change and consumers simply do not have the money to spend. Savings rates are up from 1% before the crisis to 6.9% now as over extended consumers try to reduce their debt. Apart from some tax refunds they are simply not going to be able or willing to raise cash to spend when credit is tight and there is so much uncertainty about the future. Spending is down 1.8% in the USA, the first time it has dropped so much in 58 years, according to Roach.
Much has been made about the various stimulus packages introduced by governments around the world and here Roach had some interesting comparisons to make with steps taken in the US compared to China. In many ways both packages are stimulating more of the same rather than addressing the underlying problems facing the respective economies. The US package aims to put money in consumers pockets and encourages them to spend more, when in reality they have spent too much for too long and a period of higher saving though not good for growth would be good for overall individual indebtedness. But on balance Roach favors this approach to China’s were the stimulus has lead to massive bank lending and infrastructure spending with nearly all of it directed to the already over extended sectors of investment and exports, precisely the opposite of the areas that the country needs to develop for long term stability. The money has poured into new roads mostly in central and western China and a surge of highly dubious loans to industry for investment much of it in export related activities.
In the medium term, Roach sees a return to global growth to be dependent on western world economies coming out of recession through a mixture of trade and consumer spending, something that is unlikely to become meaningful until well in 2010. Economies may technically be out of recession later this year or early next but they will still feel like they are in a recession for several quarters to come because growth will be slow and patchy. Not exactly encouraging, but probably realistic.