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Excerpt from Morgan Stanley economist Stephen Roach's August 25th essay:

All in all, a post-housing bubble shakeout could entail a haircut of at least two percentage points off the overall US GDP growth rate -- 1.5 percentage points via the construction effect and another 0.5 percentage point from the wealth effect. The overall impact could even be larger if households elect to rebuild income-based saving balances -- hardly unusual in light of the looming retirement of some 77 million baby-boomers. The repercussions of multiplier effects through construction-related hiring shortfalls could also compound the problem. For a US economy that has been growing at a 3.2% average annual rate over the past three years, a two percentage point haircut does not guarantee a recession. But it certainly could end up being a close-enough call that might trigger a recession scare in financial markets. The hope, of course, is for the exquisitely well-timed handoff -- a seamless transition from asset-dependent consumption to other sectors, such as capex and net exports. I remain suspicious of such claims of built-in resilience. If the US consumer slows, the demand expectations that typically drive capital spending will also weaken. So, too, will the growth dynamic of America’s export-led trading partners -- thereby undermining support for US exports, as well. In short, for a wealth-dependent US economy, the bursting of another major asset bubble is likely to be a very big deal.

It is also likely to be a big deal for an unbalanced global economy. In 2000, when the equity bubble burst, the gap between current account surpluses and deficits was less than 4% of world GDP. This year, as the housing bubble bursts, that same gap is likely to be around 6% of world GDP. The disparity between current account surpluses and deficits -- and the added point that the US accounts for about 70% of all the deficits in the world -- underscores the increased dependence of the rest of the world on the US. For that reason, alone, a bursting of the property bubble poses equally serious risks for America’s key trading partners and for the rest of an increasingly integrated global economy.

Source: Stephen Roach: Bursting Housing Bubble A Very Big Deal