‘The US consumer is toast’

And that’s bad news for Asia, says Morgan Stanley economist Stephen Roach

HONG KONG: Last week’s terror attack in Mumbai is a “devastating blow to the exceptional characteristics of India’s economy,” says Morgan Stanley Asia chairman Stephen Roach.

Responding to questions from DNA Money on the sidelines of the Clinton Global Initiative meeting in Hong Kong on Wednesday, Roach, however, added, that he was “hopeful” that the terror attack “will not derail India’s improved macro performance.” 

Excerpts from an interaction - on this and other subjects - with the man who during his earlier stint as chief economist at the investment bank, earned the nickname of “perennial bear” for his grim views on the US economy:

What impact will the Mumbai terror attacks have on the Indian economy?
The Indian economy has improved its macro performance a lot in recent years - in terms of boosting savings, infrastructure and even significantly improved flows in foreign direct investments… The tragedy in Mumbai is certainly a devastating blow to the exceptional characteristic of the Indian economy, but I am hopeful that it will not derail the improved macro performance.

The US is now officially in recession. How much worse can it get?
We’re in a post-bubble world right now, and I stress the word ‘world’. A lot has been made of the fact that this is America’s sub-prime crisis, or Wall Street’s problem… Yes, it started bursting in the US: a property bubble followed by the bursting of the credit bubble that has been taken over by the breaking of the biggest bubble of them all, the American consumption bubble.

US consumption in 2007 hit a world record 72% of GDP: no country in the world has every consumed that much of its national product. Courtesy of this consumption bubble, Americans drew down their savings over the past three years and went into a record level of indebtedness. Now, with asset values under pressure, credit drying out, unemployment rising, incomes under pressure, the American consumer, to be quite blunt about it, is toast. We’ve had had two consecutive declines of more than 3% in real consumption in the third and fourth quarters of this year. A capitulation of this magnitude has never happened in the history of the US.

How big a stimulus package is needed in the US?
We have a pretty tough recession, and we need a big stimulus - probably an additional 3-4% of GDP. The incoming Obama administration understands how serious the economic and financial crisis is. It is preparing major initiatives in terms of government spending, providing assistance to unemployed workers and those who are most stressed by the mortgage problem, but I don’t think it’s going to unveil its plans until January 20 2009.

Is the US dollar due for a hard landing?
The dollar was down for six years roughly 25% against all major currencies. It rebounded a lot in the last six or seven months when it became evident that the global economy is in recession. I think there’s more downward pressure to come on the dollar. I don’t see a hard landing, but I do see further declines beginning at some point in early 2009 stretching into 2010.

How long will the global recession last?
The world will be in recession for much of 2009, with gradual recovery beginning in 2010.

Does the current economic crisis signal the rise of Asia?
Everybody takes it as given that economic power has shifted or is shifting to Asia. I moved out here from the US, so I’m betting my career that that is the case. But take a look at Asia. It’s more export-dependent than ever before, and therefore more dependent on demand in the developed world. Is this really a region that’s able to stand on its own if it has failed to develop its internal demand? I think a lot of heavy lifting needs to take place in Asia.

Can China save the world?
China can’t save the world; China can do its best to save itself. China has several times in the last decade - during the Asian financial crisis in 1997-98 and during the global downturn of 2000-01 - resorted to very aggressive, pro-active fiscal stimulus, largely focused on infrastructure activities. That’s pretty much what the Chinese strategy is. Today, the external climate is a lot worse than it was in 1997-98 or 2000-01. The challenge for the Chinese government is likely to be more daunting as a result.

Does the recent depreciation in the yuan signal a change in China’s currency management policy?
I would not draw any great conclusions from two days of movements in very volatile currency markets. I think China has taken a number of extraordinary actions in recent months to deal with a significant slowdown in its economy. Those actions entail monetary easing, a major fiscal stimulus, spending on infrastructure, and ending the administrative measures that put quotas on bank lending growth. Also, the policy that’s been in place on the currency current for three years - of steady appreciation - is now on hold, but I’m reluctant to conclude that China has moved from a policy of appreciation to a policy of depreciation.