ASIA NOT IMMUNE to US Recession: Morgan Stanley

Nov 15, 2007

Export-reliant Asia not immune to a US recession: Morgan Stanley

FEELING THE PAIN: 'One lesson that Asia has not learnt, in my view, is to develop some immunity to external shocks.' - MR ROACH, on Asian economies relying a lot on growth from exports

ASIAN economies will not be spared if the United States slips into recession next year, as they are ultimately powered by the US spender rather than the Asian consumer, a top executive at investment bank Morgan Stanley says.

The region is not an oasis, untouched by US economic troubles, said Morgan Stanley Asia chairman Stephen Roach, rejecting the view that Asia has decoupled from the US.

'It is ludicrous to think Asia would be an oasis in the context of a global disturbance,' said Mr Roach, who until recently was the investment bank's chief economist and is famously bullish on Asia.

The US is 'more likely than not' to go into a recession next year, he told reporters at the bank's Asia-Pacific summit in Singapore yesterday.

When US consumers tighten their belts, Asian economies will be hit, as the US is still the main source of final demand for their exports, he predicted,

Many decision-makers in the region have bought into the notion of Asia decoupling from the US, he said, as they believe that Asia has learnt lessons from the 1997 financial crisis and is more resilient.

WEAK POINT

'Asia is less vulnerable to the dollar and more vulnerable to the state of the American consumer.' - MR ROACH, on Asia's dependence on the US'One lesson that Asia has not learnt, in my view, is to develop some immunity to external shocks.'

Regional economies have yet to move their sources of growth away from exports and to expand private consumption at home, which is lagging, said Mr Roach.

The rapidly falling US dollar has worried exporters from South Korea to Singapore.

However, he believed that 'Asia is less vulnerable to the dollar and more vulnerable to the state of the American consumer'.

Besides slowing exports, another problem faced by Asian economies is rising inflation. China this week reported that consumer price inflation rose to 6.5 per cent year-on-year last month, an 11-year high. Notably, non-food prices rose just 1.1 per cent, but food prices soared 17.6 per cent.

For nations such as China, which faces pressure mainly from soaring domestic food prices, monetary policy alone may not be enough to curb inflation, he said.

Besides raising rates, administrative measures may be needed to cool Chinese investment, he said.

Commenting on the ability of his bank's Asian business to offset weakness in the US arm, Mr Roach said: 'We've invested heavily in Asia at Morgan Stanley, but the US still accounts for a very large share of our earnings potential.

'And not just because of the sub-prime problem, if the US goes into a recession, there is likely to be more pressure on the earnings contribution made by our core businesses in the US.'

'Asia has been and will continue to be an important offset to that,' he said, but added it is hard for the region to 'offset all of the downside in the US'.