“Hot” emerging markets will be hurt by any slowdown in the US economy, Stephen Roach, Chairman of Morgan Stanley Asia, told attendees on the first day of DIFCweek.
Predicting that the US economy would enter recession in 2008, Roach said that US consumers drive the demand side of the global economy, while hot emerging economies “do not have as much dynamism on the demand side” as many people suggest.
“If US consumer spending slows in a material way, it is mathematically impossible for China and India to fill the void. The key question for the global outlook and for export-dependent countries is the fate of the US consumer,” he said, arguing against the theory of a decoupling of emerging economies from those of the United States and Europe.
He noted that US consumption is worth US$9.5 trillion, compared with US$ trillion in China and US$650 billion in India.
He then provided some background on the tremendous rise in US consumption in recent years. With consumption now representing 72% of GDP, “this gorilla is as far out on the consumption curve as it has ever been,” Roach said, adding that during the past several years, US consumption has not been income-driven but rather asset-driven, particularly increases in home prices.
“The consumption binge by the biggest consumer in the world is a housing-dependent story. But that’s over. It’s done. Home prices are now slowing dramatically and may go negative for the United States as a whole,” he said. As such, “the housing-dependent US consumer, lacking in support from income, is toast.”
This, in turn, will negatively affect emerging Asian economies since “the dynamism in Asia is export and investment led, and that investment itself is led by exports. Although there is a lot of trade integration within Asia, there’s a question about what makes up that trade. With consumption there going down, the end market demand is still the United States and Europe zone. Europe is already slowing due to credit issues, and the United States is likely to be in recession. In that climate, emerging markets will be in trouble.”
He also predicted that oil price will probably head lower, rather than higher, as the global economy goes into a down cycle.
The first day of DIFCweek is sponsored by Credit Suisse.
Gulf Economies Should Be Seen As Asset Based, Not Oil Based
Gulf states should no longer be seen as oil-based economies but rather as asset-based economies, according to Dr Nasser Saidi, Chief Economist with the DIFC Authority and Executive Director of Hawkamah.
Speaking on the first day of DIFCweek, Dr Saidi said, “For the foreseeable future, the income from assets and net foreign assets will exceed the income from oil for these countries. For them, interest rates will matter more than oil prices.”
Backing this up, he noted that Gulf countries’ foreign reserves have been growing throughout the decade and are approximately US$365 billion in 2007 and set to grow to US$455 billion in 2008. What’s more, he noted that total MENA foreign reserves are nearly US$1 trillion.
Because the region is more asset based and has higher levels of liquidity than in previous oil price booms, it can better handle negative economic shocks from the rest of the world.
He said that the region is “living in an economic renaissance”, in large part because of the “unprecedented value and depth” of investments in infrastructure, which now total more than US$1.3 trillion.
As a result of this investment, there is an increase in labour productivity and the absorption capacity of these economies, as compared to the 1970s and 1980s when most oil revenue went into consumption.
His optimism also was driven by sustained and unprecedented growth rates that the region has registered over the past five years – particularly given that “the initial impulse for this growth was oil led, but now it is very much investment led – infrastructure investment- and private sector investment-led.”
He also pointed to strong population growth rates and a reverse brain drain that is seeing highly trained and experienced Arabs and other expatriates returning to the region.
The first day of DIFCweek is sponsored by Credit Suisse.
