“Hot” emerging markets will be hurt by any slowdown in the US economy, according to chairman, Morgan Stanley Asia, Stephen Roach.

Predicting that the US economy would enter recession in 2008, Roach said that US consumers drive the demand side of the global economy, while hot emerging economies “do not have as much dynamism on the demand side” as many people suggest.

“If US consumer spending slows in a material way, it is mathematically impossible for China and India to fill the void. The key question for the global outlook and for export-dependent countries is the fate of the US consumer,” he said speaking on the first day of DIFCweek.

He argued against the theory of a decoupling of emerging economies from those of the US and Europe. He then provided some background on the tremendous rise in US consumption in recent years.

“With consumption now representing 72 per cent of GDP, “this gorilla is as far out on the consumption curve as it has ever been,” Roach said, adding that during the past several years, US consumption has not been income-driven but rather asset-driven, particularly increases in home prices.

“The consumption binge by the biggest consumer in the world is a housing-dependent story. But that’s over. It’s done. Home prices are now slowing dramatically and may go negative for the US as a whole,” he said. As such, “the housing-dependent US consumer, lacking in support from income, is toast.”

This, in turn, will negatively affect emerging Asian economies since “the dynamism in Asia is export and investment led, and that investment itself is led by exports. Although there is a lot of trade integration within Asia, there’s a question about what makes up that trade.

With consumption there going down, the end market demand is still the US and Europe zone. Europe is already slowing due to credit issues, and the US is likely to be in recession. In that climate, emerging markets will be in trouble, he added.

He also predicted that oil price will probably head lower, rather than higher, as the global economy goes into a down cycle.

The first day of DIFCweek was sponsored by Credit Suisse.- TradeArabia News Service