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.

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

  1. Tom Lindmark says

    Interesting post. How do you square his comments with the Great Depression experience of the surplus countries having suffered the most?

  2. Edward Harrison says


    I am skeptical about his comments on that score. However, I do have great respect for Roach’s analytical insight and his deep knowledge of Asia. One should be very careful and have a very rigorous rebuttal if one wants to dispute Stephen Roach on macroeconomic policy.

    Perhaps the key difference now is that Asian economies, especially China are providing massive fiscal stimulus to cushion the downfall. They can do so much more credibly than the U.S. or the U.K. given their surplus position. This means that Asia’s downturn can indeed be less severe.

    However, the Asian economies do need t spur domestic demand growth in order to have a sustainable recovery. This will take time and that seems to mesh with Roach’s view out a long recovery time frame. Whether that recovery is later than the West remains to be seen.

    At the end of the day, if and when domestic demand becomes a centerpiece of Asian economic policy, we will see a shift away from the west and a wholesale rise of Asia. That is bullish for Asia over the longer term.

    Let me know your thoughts as well, Tom.



  3. Stevie b. says

    Ed – if I didn’t know it was Roach, I’d have treated this with a massive pinch of salt. However any views I had on China & the $ in particular now need real re-thinking, although I guess remaining the world currency doesn’t mean it can’t be weak at the same time – even though it may be in good company over time in the race to the bottom of the global currency league. Wonder what his views are on gold…..

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