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Morgan Stanley’s Roach Sees Years of 'Growth Scares' as Weak Recovery Grinds On

Thursday, 16 Jun 2011 07:04 AM

The world faces years of “growth scares” as a weak recovery grinds on with little to cushion against periodic shocks, Morgan Stanley’s Stephen Roach said.

“We had a growth scare last year about this time, we’re having another growth scare this year, and I think we will have growth scares for several years to come,” said Roach, non-executive chairman of Morgan Stanley Asia Ltd. He spoke in an interview recently in Shanghai with Bloomberg Television.

Stocks have tumbled since April on concern that the global recovery is faltering as unemployment rises and housing prices fall in the U.S., Greece teeters on the edge of a default and Japan deals with the aftermath of a record earthquake.

“When you have a weak recovery, you don’t have a cushion that enables you to withstand those periodic shocks that always seem to come out and hit specific economies or the world,” Roach said. “With oil prices up, the euro zone in trouble, the U.S. housing market having another leg down, and the problems in Japan, you’ve certainly had more than your normal fair share of shocks.”


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Euro-area leaders are wrestling with how to stage another rescue of Greece without triggering a default. An emergency session of finance ministers in Brussels failed to reconcile a German-led push for bondholders to shoulder part of the cost of a new aid package with European Central Bank warnings that the move might constitute the area’s first sovereign default.

‘Critical Threshold’

“Greece has a solvency issue given its current debt overhang and the euro zone officials are treating this as a liquidity issue in providing a never-ending stream of bailouts and that’s not the answer,” Roach said. “Greece is reaching a critical threshold of pressure on the sustainability of its sovereign debt obligations.”

Separately, former U.S. Treasury Secretary Robert Rubin said that while the possibility of a double-dip American recession is “very low,” the world’s largest economy faces “tremendously powerful headwinds” in the short term.

Those include falling housing prices, rising oil costs and an unstable fiscal position, Rubin said at a conference in Seoul. “There were some fairly strong positive signs if you go back to the early part of this year, but those signs have now abated,” said Rubin, who is now a counselor at Centerview Partners LLP, a New York-based private equity company.

Roach said he disagreed with the view of his friend Nouriel Roubini, chairman of Roubini Global Economics, that China faces an economic slump after 2013 because of bad loans and investment leading to excessive capacity.

The Chinese economy is “doing just fine,” Roach said, adding that officials have a “clear strategy” to shift to a consumer-driven growth model and are alert to the threat posed by inflation.

The People’s Bank of China has raised banks’ reserve requirements after inflation accelerated to an almost three-year high of 5.5 percent in May.

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