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UPDATED: March 19, 2009
Stephen Roach: World Moving Into Decond Vave of Financial Crisis
The world is moving into the second wave of the financial crisis, which will be symbolized more by the deterioration in the global business cycle than the financial market itself, said Stephen Roach

The world is moving into the second wave of the financial crisis, which will be symbolized more by the deterioration in the global business cycle than the financial market itself, said Stephen Roach, chairman of the Hong Kong-based Morgan Stanley Asia.

"I think the second wave will be driven by the weakening of profitability of corporations around the world and that will have a negative impact on their ability to pay back loans to banks and other financial institutions," said Roach in an exclusive interview with Xinhua at Morgan Stanley Asia's headquarters.

The first wave came about through the so-called subprime crisis, sparking a broadly based and severe recession in the world economy, he said.

Out of the recession, now comes further weakness in loans outstandings by financial institutions, which will have further negative impact on the earnings of the financial institutions.

"So I think the second wave is just beginning, which reflects more the impact of global business cycle than the credit market contagion itself," said the chairman.


Roach noted that the world economic recession is not bottoming. "I think there's more to come in terms of the weakness of the world economy."

"When the year is finished, I think 2009 will represent the first decline for an entire year in world GDP we have see since the end of World War II," he said.

Roach said that the drops of the global economy in the last three quarters of the year may not be as severe as in the early months of 2009, but the global economy is going to keep declining.

"There is weakness across the world. Every major developed economy is in recession. We've never seen that before," he said.

And most large developing countries, including China, are either slowing very sharply or they are too in recession.

"This is a synchronous downturn in the global economy. There is quite a great deal further to go in my opinion," he said, adding that unemployment will keep increasing for the better part of the final three quarters of 2009.

The world economy may bounce up a while by the end of the year, as there had been very steep decline in most economies in the fourth quarter of 2008 and equally steep drop in first quarter of 2009, he said.

"So statistically, you can get a positive increase in some point in the remaining three quarters, but that will be short-lived," he said.

In large part, the global economy will be in a contraction mode through the end of this year, possibly, in the early of next year, he said.


On what could be the major risks challenging the world economy, Roach said that the biggest risk is that all the aggressive stimulus measures that had been put in place by central banks and fiscal authorities around the world can not stop the downturn of the economy.

"The deterioration is sharpened. Interest rates don't provide relief as in normal environment. This occurs very rarely, and it doesn't have a precedent in the past," he said.

The global economy is going through major asset-bubbles, he said, noting individuals and businesses have borrowed too heavily, and as those bubble are built up, they then move to the phase of reducing the borrowing, which is called "deleveraging".

The force of deleveraging are so powerful that even lower interest rates do not stop them, he said.

"So the major risk here is the stimulus policies that we have seen are not enough or not efficient to stop such very rare post- bubble downturn in the global economy," he said.


"I commend the Chinese government for being aggressive in acting a 4 trillion RMB stimulus package last November. But it may not be enough," said Roach. "I think eventually the government is going to enact additional fiscal measures."

China is a very open economy, with its export and import shares extremely high, he said, noting that a major contraction in its export markets has taken a major toll on the Chinese economy.

Roach said that China's economy will recover soon, if the country takes more aggressive actions to stimulate internal private consumption, while reducing its dependence on exports.

"I think China's economy will grow more rapidly than the rest of the world, there's no question about it in 2009," he said.


Roach said that 2010 will be a year of positive growth for world GDP, but it will be a weak recovery.

"Every recession is followed by recovery. It's going to be a weak upturn (this time)," he said, noting the post-bubble deleveraging will continue to be an important force in holding back demand in the U.S. and elsewhere in the world.

"I believe strongly the recovery following the bottoming is disappointing in terms of its vigor. We need to continue to be cautious on the economic climate for some time to come," he said.

(Xinhua News Agency March 19, 2009)

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