2003 April 02 Wednesday
Stephen Roach: SARS To Cause World Recession

As a result of the reactions to the atypical pneumonia called Severe Acute Respiratory Syndrome Stephen Roach predicts a world recession for 2003

Morgan Stanley's chief economist in the United States, Stephen Roach, will formally advise clients Friday that he's forecasting a world recession in 2003.

Roach's Monday March 31, 2003 economic commentary foreshadows his turn toward a more pessimistic view of the world economy for 2003.

The SARS shock, in conjunction with war- and trade-cycle-related uncertainties, could deal a severe blow to the Asian and global economy. Our current baseline forecast calls for GDP growth of 5.0% in Asia ex Japan in 2003 -- easily qualifying this region as the fastest-growing segment of the global economy. And yet now downside risks are building rapidly in this region of the world as well. Against the backdrop of a growth starved industrial world, Asia ex Japan accounts for nearly one-half of the 2.5% increase we are currently estimating for world GDP in 2003. Asia, in effect, had become the world’s growth backstop of last resort. Therein lies yet another serious risk.

Andy Xie of Morgan Stanley Hong Kong sees a growing economic impact from SARS. (bold emphases added)

The economic impact of this epidemic is already significant and still mounting. The virtual cessation of tourism and the contraction of service consumption may push a number of economies into recession. Hong Kong, Singapore and Taiwan may well be sliding towards recession. Malaysia and Thailand are at risk also. I experienced the effect firsthand on my return flight from London to Hong Kong last weekend. There were three passengers in my cabin -- a 10% occupancy rate at best. Hong Kong’s restaurants are mostly empty. It is difficult to enjoy a meal with masked waiters tiptoeing around in silence. If you want to frighten people in Hong Kong, just sneeze. Exports are peaking. Real capex is only taking place in China. Tourism and consumption have been the only factors keeping East Asian economies out of recession. Now SARS is knocking the wind out of both. In particular, Chinese tourism is likely to decrease dramatically. The number of tourists from China increased by 4.5 million to 16.6 million last year. With most going to Asian destinations, this was the primary channel for China’s FDI and export successes to spill over into other Asian economies.

A reduction in business travel, and even of business meetings between people who are within the same geographic proximity, will reduce the rate of decision-making for capital investment decisions and the rate of business deal-making. Fear of SARS could become a far greater source of uncertainty than war.

In light of the economic impacts of SARS it is of interest to see how SARS might affect China. Contrary to conventional wisdom Stephen Roach does not see a big shift in China's economy toward satisfying domestic demand. If he is correct then the Chinese economy's dependence on the export market for growth will make it quite vulnerable to a world recession.

According to our China expert, Andy Xie, purchases of foreign-made equipment have accounted for fully 55% of the growth in total Chinese imports since 1997; chemicals make up another 20% of the total growth in imports over the past five years, whereas purchases of foreign-produced fuels and related products account for another 13%. That means fully 88% of the cumulative growth in Chinese imports over the 1997-2002 interval can be tied either to capital formation or to the fuel or feedstocks of the industrial supply chain. That’s why I have concluded that there’s far more to China’s spectacular success than a self-contained domestic demand story.

The rate of new foreign direct investment in China could slow as a result of a combination of decreased business travel and slackening world demand. Therefore China's economic growth could slow or stop along with the larger world economy.

If you want to track SARS from more of a public health and science perspective then read my Natural Dangers archive on the FuturePundit blog. The post WHO Advises Against Hong Kong, Guangdong Travel illustrates how SARS can very rapidly cause a large economic impact.

Share |      By Randall Parker at 2003 April 02 01:38 PM  Economics Political

godlesscapitalist said at April 2, 2003 5:58 PM:

SARS may stop the coming threat of a resurgent China.

Kevin said at June 6, 2003 9:51 AM:

SARS is going away. How are we going to stop the Chinese?

joey said at June 11, 2003 12:21 PM:

Roach has been predicting a economic collapse for some time now. First it was this then that now SARS....well it hasnt happend yet. When will Morgan Stanley finally get tired having their name and Stephen Roach's in the same sentence?

Post a comment
Name (not anon or anonymous):
Email Address:
Remember info?

Web parapundit.com
Go Read More Posts On ParaPundit
Site Traffic Info
The contents of this site are copyright ©