US consumption not supported by income: Roach

Economist at Morgan Stanley, Stephen Roach says,"I think we are coming to a critical point in the global business cycle, where an unbalanced world needs to get rebalanced and I think the key mechanism of that rebalancing will be slower rate of consumption by the US consumer. I think that's been triggered as we speak by the bursting of the US housing bubble. I think it has global consequences for those economies that are heavily dependent on the US consumers."

Excerpts from an inerview given to CNBC-TV18

Q: Are you feeling bullish or bearish?

A: Both - I hate labels. The global business cycle is turning to a downside and that will certainly leave me bearish on prospects for world economic growth for 2007. The constructive comments that I have added to the debate in the last few months, have more to do with structural underpinnings of the global economy. And the fact that the so-called stewards of globalization - the G7 Finance Minister and the IMF are now mindful of the serious risks that could be caused by mounting global imbalances and are beginning a long process to do something about it. So, I have to take those legitimate concerns and efforts on board, in accessing my overall outlook for the global economy.

Q: I read in one of your recent reports that you are structurally positive but cyclically slightly pessimistic, what does that mean?

A: Again that is very much what I try to say. Cyclically, the world economy looks like it will disappoint next year, in terms of economic growth as the US housing bubble bursts, the US consumer and the construction industry feels the heat - it has global implications. Structurally, if the G7 and the IMF can get the architecture right in dealing with global imbalances, that could temper the downside and that will leave me a little less pessimistic than I might otherwise be.

Q: Are you convinced that structurally we have a lot to be positive about?

A: This is a glimmer that things may be getting better in terms of the global policy architecture, that is required to deal with mounting imbalances. We have an IMF meeting coming up very shortly, which will give us a further read, whether or not these global policymakers are truly up to the task.

Q: Do the cyclical factors really worry you?

A: It certainly was a possibility six years ago, plus an equity bubble popped and the world went into a mild recession at the end of 2000 and early 2001. We are now seeing the bursting of a major asset bubble in the US property market. It could well have equally profound implications on the US and what is still a US-centric global economy. We have to take these developments seriously and if an asset bubble six years ago gave us a recession - the question obviously is why can't it do it again this time as well?

Q: You have seen the first signs of trouble in the housing market already - can we get away with  or do you think it will be a really big problem?

A: There are two dimensions of the housing bubble response - there is the construction activity that is associated with building new homes and renovation of old homes and there is the price effect that has to deal with the value of the asset class. In the construction area, we are moving under recession right now, we are not going to get away with a mild slowing of growth rate. There is a huge backup of inventory of unsold homes - both new and existing sales are falling precipitously.

Ironically, construction activity is still being maintained at a high level in the residential construction sector because a lot of projects underway need to be completed but the pipeline is drying up and there will be a recession. In terms of house prices, the adjustments will hopefully be more moderate. We are hoping that there won't be a widespread price destruction and major declines in home prices. If that occurs, then the impact on wealth dependant, asset dependant American consumers will be particularly acute.