Aug 06
28
Global Economy – Predictions from Morgan Stanley
Stephen Roach has some more things to say…. and I figure that this is a smart man, or else he would not be Morgan Stanley's Chief Economist… and whatever he puts into print he knows may come back to haunt him…
So my belief is that Roach is always very conservative in what he puts into the public domain. So read between the lines to imagine what is said behind closed doors at MS.
A
bursting of the US housing bubble could give rise to alternative
rebalancing scenarios in world financial markets. If the US consumer
retrenches gradually, the ensuing rebalancing would most likely have
benign implications for asset prices — that is, foreign investors will
probably not lose confidence in dollar-denominated securities.
However, in the event of a sharp and abrupt pullback of the
post-housing bubble American consumer, a more disruptive strain of
global rebalancing could be unleashed — as foreign investors draw into
question both the return and the relative interest rate advantages of
investing in US assets. In that latter case, both the dollar and
longer-term US real interest rates could come under serious pressure.
is important to stress that the sharp consumer retrenchment scenario
does not require a precipitous decline in US housing prices. As noted
above, my baseline guesstimate translates a flattening out of housing
values and a concomitant cyclical decline in residential construction
activity into a 1.5 percentage point slowdown in trend consumption
growth. The saving response of saving-short US households undoubtedly
is pivotal to any pullback. A modest increase in the preference for
saving shouldn’t do serious damage. However, a sharp increase in the
personal saving rate implies a more severe consolidation in consumer
demand — an outcome that could very much unsettle foreign investor
appetite for dollars. The degree of global imbalance — a record gap
between surpluses and deficits that could well exceed 6% of world GDP
in 2006 — is hardly comforting when contemplating the downside to
financial markets under more severe consumer-adjustment scenarios.
My interpretation: Hang on, we are in for a wild ride. And it doesn't matter where you live, you had better be watching what the US consumer numbers say quarter by quarter. As and when the US consumer backs off, the global rebalancing begins. Its like a gyroscope. When the momentum of the core slows the gyro totters…
Fortunately in Australia we have had pretty conservative fiscal management from both the Libs and the Federal Reserve bank over the last 10 years. (unlike the previous regime where Keating gave us the recession we had to have). But – we are just as reliant on the US economy as the Chinese are. Australia is a totally resource centric economy (Thank Howard for that – there are virtually no incentives for entrepreneurs in this country. You get taxed to buggery for making a decent capital gain and you even get taxed on the option grants you receive before they are in the money if you are not careful!). So all of our exports are priced in greenbacks. If the US teeter-totters and the greenback takes a dive, the net effect to Australia is that companies that export coal, iron, wheat etc are all going to have to tighten their belts.
That will clearly spin into our own housing sector which is already fragile particularly in the suburbs.