Life After Subprime

Abstract

The subprime downturn is not a normal economic cycle. We may not see a normal recovery process. Deflationary forces in the post-bubble economy are huge, as debt unwinds across the developed world. There will be periodic goods price and asset price deflation, perpetuated by de-leveraging in the private and financial sectors. Consumption in the developed world will be especially feeble in the coming years. All this will put an end to the emerging markets’ export-led development model, crimping profit growth in Asia’s export-led economies and sectors. In other words, export-led growth is dead. Asia has not learnt from the 1997/98 Asian crisis experience, so adjustments in both economic and corporate earnings growth terms will be tough this time.