Perhaps thatÆs because these US citizens live and work in Asia û and while he doesnÆt buy into the decoupling theory, heÆs less bearish on the region.
ôI certainly am negative on prospects for the US economy. I am far less negative on what that means for Asia,ö says Roach, joking that Morgan Stanley moved him from New York to Hong Kong because the firm knew heÆd be happier here.
ôBut Asia has, I think, been the greatest beneficiary of the global boom of the last five years and it has ridden the global cycle on the upside. I donÆt think it miraculously decouples and avoids some cyclical pressures that will now be emerging on the downside.ö
He adds: ôMy advice to people in Asia is to be careful. There is no special dispensation from the downside of a cycle in a region so tied to the rest of the world economy.ö
How negative is Roach?
ôAs to your basic question whatÆs the outlook for the US economy, well the answer, in one succinct word is æterribleÆ,ö he says -- adding that he finds it highly unlikely the US will avoid a recession.
His reasoning is clear-cut.
He points out that last year US personal consumption expenditure was 72% of GDP, up from the 1975-2000 average of 67% of GDP.
ôTypically consumers are supported by income. But that has not been the case in the current cycle,ö says Roach. ôConsumers have been on a buying binge of the likes the world has never seen. How have they been doing it? TheyÆve turned their homes into ATMs.ö
There were two factors behind that. The housing bubble and the credit bubble that enabled consumers to leverage their assets like never before. And both of those bubbles have burst.
ôThis year will be the first year that nationwide house prices will have declined in the US for the first time since 1933. Those of you who have studied economic history in America will recall that 1933 was not one of our better years. And most likely, given the large inventory of unsold homes that still exist, house prices will be down again in 2009,ö says Roach.
On the back of the two bubbles, US citizens spent over $9.6 trillion on personal consumption last year, six times the spend of China and India combined where consumption totalled $1.6 trillion in 2007. ItÆs unlikely China and India can pick up that slack.
ôSo when consumption slows we're going to have a global demand shock,ö argues Roach. ôWe donÆt make too many things anymore in America but we did make a demand shock.ö
The slowing consumption from the US will cause a cyclical slowdown in Asia. But for the US, the problems are deeper than the public and politicians may want to accept. And that could lead to a bigger problem in the long run: protectionism.
Consider the current China bashing phenomena in the USùRoach points out that there have been 45 separate pieces of anti-China legislation proposed in the past three years .
ôYes, we have a huge bilateral trade deficit with China. But we have trade deficits with over 40 other countries. The non-Chinese piece is nearly three times as big as the Chinese piece. We have a multilateral problem. We donÆt have a bilateral problem. And we have a multilateral problem because we donÆt save,ö says Roach.
ôThe biggest bilateral piece of our multilateral deficit is with China because of the decisions of US multinationals to search for low-cost producers which they find in China. Is that ChinaÆs fault?ö
He points out that if you close down trade with China then ôthe bilateral piece of trade with China just goes somewhere else, presumably to a higher-cost producer and that negatively impacts the American publicö.
But he says his views have not been well received by the US Congress. He worries that if the recovery is subdued and unemployment keeps rising that could trigger even more of a protectionist backlash and, at some point, one of the anti-China pieces of legislation might be passed.
Not one to mince words, Roach ended on a gloomy note.
ôIf all we had in the US was a subprime problem, I would be so bold as to say we would not go into recession. There are not enough subprime borrowers in the general population to trigger a macro recession in the US economy. The middle class is going to bear the brunt of this downturn. The middle class has not seen an increase in real wages in a decade, despite rising productivity. The middle class is now getting squeezed by higher inflation in food and energy û and for middle class Americans food and energy matter a lot û economists strip it out because itÆs the way weÆve done inflation for a long time and thatÆs a huge mistake.ö
In sum: ôI think this is going to be a broader recession and a tougher economic climate for a broader cross-section of Americans.ö
And that will be exported.
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