Revival banks on US spend

Mumbai, Feb. 9: Global recovery is many years away because unless consumer spending in the US picks up, there can be no recovery.

Consumption is barely 71 per cent of GDP in the US today because it has lost support from the labour and job market and the burst of the property and credit bubbles. Mr Stephen Roach, chairman, Morgan Stanley Asia said that this 71. 2 per cent consumption share of the US economy is likely to fall to 66 per cent a full five percentage drop, in the next three to five years.

He said the financial crisis is far from over and the IMF has recently released figures to show that subprime assets — which led to financial crisis — have still not been unwound. It has put down the worldwide write-downs of toxic assets at approximately $3.4 trillion and only about half of this has been marked down. This spells further trouble ahead for banks and financial institutions.

Referring to the fall in US consumption he said this will adversely affect the demand side of the global economy which depends heavily on US consumption. India and China are the fastest growing economies but they cannot fill this consumption gap. Consumption to GDP is much lower in case of India and China. “No other consumer in the world is capable of filling this void,” he said.

Pointing to the imbalance of growth in China Mr Roach said that whilst China has been put on a pedestal for recording the fastest growth, employment growth since 2000 has been less than seven per cent. It had the weakest employment growth. India, he said, had a growth of one and a half per cent per year. In this context he said what intrigued him about India was the high rise in the share of services in India.

Unlike the manufacturing sector which is considered labour intensive, services is not considered labour intensive. He held a contrarian view that the manufacturing sector will see a cut in employment and labour as it introduces more and more technology to save on costs.