Asia needs to take events in US more seriously, he says
THE United States could face a consumer-induced recession next year, which will also hit Asian economies, said Morgan Stanley's chairman for Asia, Stephen Roach.
Speaking at the World Knowledge Forum in Seoul, Mr Roach - well known for his bearish views - presented what he called a 'decidedly sub-prime outlook' for the US economy.
The so-called sub-prime mortgage crisis is 'the tip of a much bigger iceberg', he said. It has started to hit the American consumer.
Mr Roach, who has long predicted a US economic slowdown, pointed out that the US consumer is facing the toughest times in 30 years, and the impact on the economy could be acute.
He noted that in the first half of this year, US consumption accounted for a record 72 per cent of GDP, or about US$9.5 trillion.
'The US consumer is about to take a long rest,' he said, 'and if the US consumer goes, there's nobody on the demand side who can fill the void.' Even China's total consumption is only about one-ninth that of the US, he noted.
Mr Roach suggested that the US consumer is at risk because the consumption binge of the last seven years has been underpinned, not so much by rising incomes but by a wealth effect which has, in turn, been driven by 'an extraordinary property market'.
In short, 'the US consumer has turned his home into an ATM machine', he added.
But now, with the US property bubble deflating, the wealth effect, based on rising home values, 'is over, is done, is finished'.
In fact, next year, home prices for the whole of the US could decline for the first time in history, he predicted, which would severely diminish US consumers' ability to extract equity from their homes.
In the face of this, Mr Roach said that the risk of recession 'is quite high'.
Although sub-prime mortgage assets account for only 14 per cent of all securitised assets, the sub-prime crisis has already spread.
Moreover, 'the big story gets written in the real economy, not in the financial markets', he said.
And worth noting here, he added, is that US consumption is about five times the size of US capital spending, which triggered the US recession of 2001.
Mr Roach, who is based in Hong Kong, said that Asia needs to take developments in the US more seriously.
'What's worrying is a complacency in Asian markets, based on a belief that Asia has 'decoupled' from the US,' he pointed out.
But the decoupling thesis is fanciful, he said, noting that the US absorbs 21 per cent of China's exports, 22.5 per cent of Japan's and about 14 per cent of Asean's. 'If the US consumer goes down, Asia will feel it,' he said.