Financial Times - May 2, 2006
Bank chief revises gloomy outlook By Jennifer Hughes in New York
The world economy may be able to unwind its current imbalances without serious disruption, Stephen Roach, Morgan Stanley's famously bearish chief economist, predicted yesterday, in a remarkable revision to several years of gloomy prognosis.
Mr Roach had long warned that the US current account deficit and Asian central banks' ballooning currency reserves risked destabilising the global financial system.
But yesterday, in a note to clients, he said: "I must confess that I am now feeling better about the prognosis for the world economy for the first time in ages."
His comments came as the dollar hit a one-year low against the euro and seven-month low against the yen, as investors remained confident the Federal Reserve was nearing the end of its interest-rate-tightening cycle. Mr Roach said the tipping point had been last month's decision to mandate the International Monetary Fund to begin multilateral discussions with the aim of resolving the largest trade imbalances. At the same series of meetings, the Group of Seven highlighted the need to address the imbalances, underlining policymakers' apparent resolve.
"I've been wringing my hands over the mounting global imbalances for longer than I care to remember," said Mr Roach. "The world is finally taking its medicine - or at least considering the possibility of doing so. The risk is that this is so far only on paper, but it's a critically important first step."
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Financial Times - May 4, 2006
Morgan Stanley's former Cassandra takes a mellow turn By Chris Giles, Economics Editor
Stephen Roach has been Wall Street's most famous pessimist on the outlook for the US and the world economy. But for the first time since 1999, Morgan Stanley's chief economist no longer feels he has to play the role of Cassandra.
"It was not a religious conversion, I can assure you," he said in an interview with the Financial Times. "There is no guarantee there's going to be an instant fix to an unbalanced world, but the odds to a more benign rebalancing are higher now."
There is no doubt that the world's economy is unbalanced, with an unprecedented US current account deficit of 7 per cent of gross domestic product, matched by large surpluses in China, Japan, Germany and oil producing countries. This has been dismissed by some analysts, but has concerned most mainstream economists, fearful that it might lead to a crash in the dollar, higher interest rates in the US and a downturn from which no significant economy would be immune.
Mr Roach has been more concerned than most, but for the first time in 3 1/2 years, he can now see a plausible path for a gradual rebalancing.
Most important, says Mr Roach, is the new approach taken by international policymakers, who showed at the spring meetings of the International Monetary Fund last month a new willingness to seek a co-operative solution.
"The G7 and IMF breakthrough is that . . . if the process comes together . . . there would be more of multilateral approach to managing the world . . . and a better opportunity to look at the world holistically."
He points to five reasons why he has become more optimistic. First, international policymakers have come to realise that an unbalanced world is a shared responsibility needing a collective response. Second, continued rapid globalisation has kept inflation under control. Third, central banks have collectively embarked on bringing their interest rates back to normal levels. Fourth, he says there are signs that the US housing market is calming down without signs of an impending crash. And fifth, that Asia, especially China, has recognised the unsustainability of export-led growth models and is seeking to boost domestic consumption.
His view on a new seriousness among policymakers is certainly shared by Mervyn King, the governor of the Bank of England, who had previously warned that the IMF could "slip into obscurity". Last week, he told the British parliament that the spring meetings were "the first occasion that I genuinely felt there was some real interaction among the people around the table and where we could actually be doing something useful".
But Mr Roach's views on China's exchange rate do not chime with most of the rest of the economics profession. He laughs at suggestions that an appreciation of the renminbi against the dollar is a central plank to any mix of policies needed for global rebalancing.
"If China were a pure market economy with relatively stable financial institutions then a revaluation of the renminbi would be appropriate, but China's not there."
If China's exchange rate divides economists who care about imbalances, they tend to be united in a belief that the US economy has no alternative but to accept a reduction in US economic growth as part of any rebalancing.
"Where I'm really critical of Washington is in believing that 'if America can deal with China then it will have licked its trade problems'. I mean that is just a joke," Mr Roach says, leading him to temper his optimism about the world. "I think we [the US] need to grow slower, and if the rest of the world is not willing to pick-up its own internal demand to offset that then the world deserves to grow slower - that's the bottom line."