World economic boom set to fizzle: Roach

David Altaner

LONDON: A worldwide economic boom may be about to fizzle out, because the main cause of the prosperity, a US consumer spending spree, is probably ending, said Stephen Roach, chief economist at Morgan Stanley.

Writing in the Financial Times, Roach said that two asset bubbles — first stocks, then housing — kept the US economy perking as consumers spent freely.

Yet higher energy prices, the rising cost of paying debt, and a negative personal savings rate mean that US discretionary spending and gross domestic product growth are very likely headed for a pullback, he wrote. The reduction in consumer spending will mean that the US will start to reduce its current account deficit, but that will be painful for countries highly dependent on exports, the economist said.

Neither European nor Japanese consumers are available to fill the gap, Roach wrote. The European economy has done surprising well recently, but the growth may have come as gains were borrowed from next year, he said.

Japan’s economy is recovering, yet Japanese personal consumption is only 30 percent of that of the US, he said. It’s unlikely the boost to the world economy will make up for the US pullback, Roach said.

China will be tightening its economy to prevent overheating, a measure which should see its growth slow next year, Roach wrote.

India’s economy is too small to have enough impact on the world scene, the economist said.

The world boom was never sustainable, because it was spurred by “emergency anti-deflationary actions” by central banks, Roach said.

In addition, “America’s binge came at the cost of a record drawdown of domestic saving funded by the capital inflows of a record US current-account deficit,” the economist wrote.

The world economy will have to rely on labor-income generation for its growth, a far more modest source, he said.