Stephen Roach: Downturn in Asia less severe, but recovery later

Morgan Stanley Asia head Stephen Roach believes that Asia will weather the economic storm with a less severe downturn than the West. However, as the economies are predominantly export-led, he also believes that the countries are followers, not leaders. Translation: Asia will recover more slowly.

Asia will have a less acute impact from the global financial and economic crisis but their recovery will also be slower than Western countries, said Morgan Stanley (Asia) chairman Dr Stephen Roach.

He said Asia’s economies, which were largely export-led, would only recover after their main export markets, the US and Europe, recovered.

“Export-led regions are followers, not leaders,” he said. “The only possibility (to recover earlier) is China, as it has large infrastructure spending in place that could provide support for economic growth.”

Roach has predicted that China will recover by the second half of this year.

He said Asia would grow below market projections this year, forecasting Asian growth at less than 2.5% and the rest of the world at between -1% and 1.5%.

Asked if China could turn its high savings into consumption, he said unless China extended its safety net for employment and social security, consumption in China would remain deficient.

Edward here. One should also note Roach’s views on stimulus and monetary policy which dovetail with what I have said — in a nutshell: fiscal stimulus good, monetary stimulus bad.

Roach also said he doubted that the use of monetary policy to boost the economy could be as effective as before.

“One of the consequences of lowering interest rates is high inflation. But my utmost concern is what the exit strategy for this aggressive easing is? How do you wind down without tipping to deflation,” he said, citing the example of Japan, where the economy had not been stimulated even with near zero interest rates.

Roach said he preferred fiscal policies, especially those which focused more on investments rather than private consumption, as he felt businesses were better credit managers than individuals.

On the US financial crisis, Roach said he blamed it on the reckless consumption, politicians and the central bank.

He said the US was only 20% through its deleveraging cycle and that the adjustments being made would take a number of years to complete.

On the US dollar, Roach said the greenback would continue as the world currency for a lot longer than many people thought, probably for a further 20 to 30 years.

You will have noticed that Roach thinks the deleveraging is only 20% complete. That means 2009 is a complete writeoff. However, when we do resume growth, excessive monetary stimulus may lead to inflation. First the deleveraging and the deflation, then the inflation. But, that’s a story for 2010-2011.

Source Morgan Stanley chief: Asia will be less affected by crisis – The Star Online

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3 Responses to "Stephen Roach: Downturn in Asia less severe, but recovery later"

  1. Guest   February 12, 2009 at 1:52 pm

    So, why are we listening to Mr. Roach, could it be his less than stellar track record?

  2. Allan Green   February 13, 2009 at 3:22 am

    His less than stellar track record?You gotta be kidding. This guy had the crisis prefigured by about 9 years! He still gets his macroglobal better than Roubini.

  3. Anonymous   February 13, 2009 at 7:50 am

    Agree. Roach has been talking about the dangers of global imbalances since 2003, at least. He was early, but he saw it all coming.