Dalal Street Investments

No V-shaped recovery for Global Economy – MS

January 15, 2009

Morgan Stanley’s Asia’s chief Stephen Roch has said that there will be no V-shaped recovery for a world economy that has just entered its most severe recession. The worst of the global downturn may run its course by late 2009. After a 5% global growth over the past 5 years, it is likely to average 3% over the next 3 years.

The US consumers have long been ripe for the fall. Vigorous consumption gains consistently outstripping a subpar pace of income generation over the past 14 years, saving-short, overly-indebted households drew freely on the combination of property and credit bubbles to take consumer spending up to a record 72% of real GDP in late 2006 and early 2007. But now, with those twin bubbles having burst, US consumption has fallen sharply at more than a 3% annual rate in the second half of 2008.

In short, prospects for a multi-year compression in US consumer demand pose a major problem for an unbalanced global economy. Americans consumed $9.7 trillion in 2007 more than thrice the combined consumption of only about $3 trillion coming from 40% of the world’s population that lives in China and India.

Finally, the asymmetries of global rebalancing could well be decisive in shaping the contour of any recovery in the global economy.


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