Monday, November 20, 2006

Morgan Stanley's Roach: Two-Engine Slowdown

by Bill McBride on 11/20/2006 11:38:00 AM

Stephen Roach, Chief Economist of Morgan Stanley, writes: Two-Engine Slowdown

"The US and Chinese economies are slowing sharply as 2006 comes to an end. Inasmuch as these two engines have accounted for about two-thirds of the cumulative increase in world GDP over the past five years, this two-engine slowdown can hardly be taken lightly. In my view, it poses major downside risks to the global soft-landing call embedded in liquidity-driven financial markets."
Please read his piece for the details. Roach concludes:
"As I put this all together, I continue to believe that global growth will fall well short of consensus expectations in 2007. The IMF’s forecast of another year of 4.9% world GDP growth in 2007 -- identical to the trends of the past four years and the strongest surge in global activity since the early 1970s -- is very much in line with what I hear from the broad consensus of investors I meet with around the world. Implicit in this view is that nothing can stop the American consumer or the Chinese producer -- conclusions that are both being drawn into sharp question in the final months of 2006. With slowdowns in the US and China likely to have a meaningful impact on two-thirds of the global growth dynamic, the burden of proof for the case for global resilience has shifted to the decoupling crowd. The sharp -2.8% annualized decline in Japanese consumption in the third quarter of CY06, together with recent disappointing trade date from Taiwan and Korea, do not exactly bode well for the decoupling case.

There’s one word that permeates virtually every discussion I have with investors around the world -- liquidity. It’s literally the only thing they want to talk about. In the view of most fund managers, liquidity remains more than ample to support ever-frothy markets -- irrespective of the outcome for the global economy. I continue to suspect that this disconnect between the global growth and liquidity cycles will be resolved one way or another in 2007. For my money, the risks of the “global fizzle” are being taken far too lightly."