Morgan Stanley's Roach says US faces deflation risk
Stephen Roach, chief economist at Morgan Stanley, said the US economy faces deflationary risks as part of the continued unwinding of the stock market bubble, which includes the possibility of multiple dips back into recession for several years to come.
"Deflation is a significant risk in the US," Roach said at an investor conference in the UK, adding that the US GDP price index is currently posting a 1% year-on-year rise, the lowest rate in 48 years.
Excess supply for businesses will continue to erode pricing power among companies, while continued economic globalisation will increase imports from cheaper overseas markets, further "importing deflation", he said.
As part of this scenario, US growth will be very sluggish for the next two years, continually slipping back into recession, as seen in Japan throughout the 1990s. "I'm not talking about just a 'double-dip', but a 'triple-dip' or a 'quadruple-dip'," Roach said.
"That's what happens to any slowly growing economy," he said.
Following the continued unwinding of the stock market bubble, Roach said the US housing market has seen abnormally high price increases, leading to bubble conditions that will eventually be reversed. "Housing prices have seen the sharpest 5-year increase since World War II," he said.
"A post-bubble response is like peeling away the layers of an onion. The property bubble will be the next to go, and then I think the consumer will be next" to reduce spending, Roach said.
To avoid this scenario, Roach said a surprise 50-75 basis point cut in US interest rates would be helpful, but he added that, "The American consumer is addicted to shopping," which has depleted saving rates and led to record debt levels.
Roach and Morgan Stanley's economics team recently cut their global GDP growth forecasts to 3.4%, "one of the weakest global recoveries on record," he said.
Concerning Europe, Morgan Stanley's chief economist for the region, Eric Chaney, said his team is currently working on lowering GDP growth forecasts for the euro zone in 2003, saying that "if we hit 2% next year, that would be good," but without providing the team's new forecast.
Morgan Stanley had originally forecast 3.2% GDP growth for the euro zone.
