Stephen Roach on Sustainability of World Economic Growth

Excerpt from Morgan Stanley economist Stephen Roach's September 5th essay:

For most of the last decade -- and especially over the past four years -- it has been a one-consumer world. But now as the over-extended American consumer weakens in a post-housing-bubble climate, the world growth dynamic could falter as a result. For that not to happen, the baton of global economic leadership has to be transferred quickly through the exquisitely well-timed handoff that many still seem to be counting on. For reasons I have long advocated, I don’t think another consumer is capable of stepping up and filling the void (see my 28 August essay). Nor do I believe that another sector in the US economy, such as business capital spending, will take up the slack. Too much of the incremental capex decision is heavily conditioned on the expected state of end-market demand. A likely slowing of US consumption is a distinct negative in that regard.

Financial markets are playing the growth debate as a standard cyclical risk-assessment exercise. I don’t think there is anything standard about the adjustments now under way. An unbalanced global economy is very much an outgrowth of an asymmetrical globalization. As the US-led demand side now weakens, downside adjustments to global growth expectations could be fast and furious. Bonds have rallied and equities have held their own in the belief that all this ends in a well-orchestrated soft landing. Yet lacking in consumption support, that optimistic endgame could be no more than wishful thinking. Moreover, in a slower growth climate, the squeeze on labor income can only raise the odds of a social and political backlash -- giving even greater reason to worry about the protectionist wildcard. If the American consumer now fades, as I suspect, the pitfalls of the global growth paradox could pose serious problems in 2007.