The global economic downturn has only just begun, with the US heading into a recession and the impact of the credit crunch still to be fully felt, said Stephen Roach, Morgan Stanley's Asia chairman.
“There's more to this macro event than just the credit- market contagion itself,” Roach said in an interview with Bloomberg Television in New York today. “Maybe two-thirds of that is behind us, but the impacts on the real side of the US economy and the global economy are at an early stage.”
Growth in the US, the world’s largest economy, is likely to weaken in the second half after a stronger-than-forecast second quarter as rising unemployment and falling home values crimp consumer spending. That will hurt European and Asian exports and hamper the global expansion, according to Roach.
“We’re in the early stages of the downturn in the US and global business cycle,” he said. “As the US consumer goes into post-bubble funk, Asian exporters will feel it. That’s certainly evident now in China and it’s spreading through developing Asia.”
Roach was proved right earlier this year as weakening expansions in Europe and Japan justified his questioning whether they could “decouple” from the US slowdown. He said in April 2007 that “the global economy is likely to be a good deal weaker than the decoupling crowd would lead you to believe.”
Scholes, Stiglitz: Nobel Prize-winning economists including Myron Scholes and Joseph Stiglitz are equally pessimistic, last month predicting the credit squeeze will inflict more pain on the world economy.
“There will be a global recession,” Scholes said on Aug. 21 at a conference featuring 14 Nobel laureates in economics. Stiglitz forecast the world economy would continue to perform below its potential for some time, resulting in a “social loss” through weaker employment.
President George W. Bush on Aug. 30 said the U.S. economy is ''beginning to improve,'' aided by the $168 billion fiscal stimulus package he signed in February. Roach said that while the government's tax rebate may have lifted consumer spending, ''there's going to be payback in the second half of the year.''
U.S. gross domestic product increased at a 3.3 percent annual pace in the three months through June, the Commerce Department said on Aug. 28, faster than the 1.9 percent initial estimate. Still, the index of leading economic indicators declined in July, suggesting the slowdown will deepen in the second half, while an index of manufacturing fell in August for the first time in three months. Dollar, Commodities
As the world economy cools, the dollar may continue to rise and commodities such as oil and base metals may decline, Roach also said today. The dollar rose as much as 1 percent today to reach a seven-month high of $1.4467. Oil fell below $106 to its lowest level in five months.
Equity markets will trade ''sideways to lower'' until at least early 2009, Roach forecast. ''Investors, especially in equities, have to be wary about being too optimistic on the earnings implications of what could be a long and drawn out multi-year adjustment for the U.S. consumer.''
