US Faces Long, Moderate Recession: Stephen Roach

Source : The Business Times, November 14, 2008

He says Asia will still emerge in better shape than the rest of the world

THE world economy will take years to return to the rapid growth it experienced before the current financial crisis struck, Morgan Stanley Asia chairman Stephen Roach said yesterday.

Mr Roach: The recovery in the global economy is going to have a big, wide bottom and then a very gradual up-slope in 2010 or 2011. 'The best I can see in the years beyond that is a return to 3.5-3.75% global growth'

But Asia should still manage to weather a long but moderate recession in the US relatively well, he added.

'The global economy is in terrible shape right now. This is the worst global crisis that I've seen in my 36-year career as a professional economist,' said Mr Roach, who was Morgan Stanley's chief economist until his appointment as head of the group's Asia operations in April last year.

'Asia is going to feel the impact, but Asia is actually going to come out of this better than the rest of the world, and I think the markets are overdoing the gloom with respect to Asia.'

He was speaking to reporters at Morgan Stanley's annual Asia-Pacific Summit in Singapore.

The US will most likely go through a lengthy but moderate recession as consumer spending contracts and people there gradually adjust to lifestyles fuelled by less borrowing, he said.

'My suspicion is that the US recession is going to be long, but it's not going to be deep - it'll be moderate, but not mild.'

In that case, Asia will still fare better than the rest of the world, managing about 5 per cent growth in each of the next two years, he said.

On Wednesday in the US, Morgan Stanley said it would fire 10 per cent of staff in its main institutional securities business - which includes investment banking - and 9 per cent of workers in asset management, Reuters reported.

Asked how the latest job cuts would affect the bank's operations in Asia, Mr Roach said only that the staff cuts in Asia 'will be a good deal less than our global work force reductions given our belief that this region is a huge source of growth for the world and for Morgan Stanley'.

The four-trillion-yuan (S$880 billion) package of fiscal measures announced by China last Sunday would likely support China's economic expansion at about 7 per cent, even as the contribution to growth from exports slow sharply, he said.

'If China can hold the line at 7 per cent, then the region can hold the line at say, 5 per cent, and Asia will come through this global tsunami in better shape than the rest of the world.'

But the prospects of a rapid rebound in economic activity worldwide to pre-crisis levels are dim, he said.

'I think the recovery in the global economy is going to have a big, wide bottom and then a very gradual up-slope in 2010 or 2011 - an anaemic recovery.'

Economic output worldwide, as measured by gross domestic product, grew at an average annual pace of nearly 5 per cent in the four-and-a-half years to mid-2007, when the current crisis started, he said.

'It's now slowed to about 2-2.5 per cent - this is a recession by any standards and it's an amazingly sharp and abrupt slowdown.'

Any recovery in global GDP will likely only emerge in 2010 and 2011 and 'the best I can see in the years beyond that is a return to 3.5-3.75 per cent global growth', he said.

'The 5 per cent, bull-like years of world GDP expansion - you're not going to see that for a long, long time, in large part because of the multi-year adjustment of the US consumer.'