Highlights of the speech given by Peter Churchouse, Managing Director, Morgan Stanley Asia Ltd, at the Chamber's Oct. 5 workshop.

1. Early rebound expected on big U.S. stimulus package
Last month’s terrorist attacks in the US are likely to lead to a sharper than previously expected decline in the US economy. However the powerful monetary and fiscal response by the Federal Reserve and the Bush Administration could eventually result in an earlier and , sharper, recovery for the US economy. "It increases the prospects of a ‘V’ rather than a ‘U’ shaped recovery."

2. Policy Responses
It is expected that the pump-priming, including tax cuts for business and tax payers, to lead to a US recovery in the first half of 2002 and good growth in the second half of the year. "We are likely to see a similar pattern of recovery in Asia and in Hong Kong."

3. 2002 will see big cuts in growth
Morgan Stanley recently revised its global growth forecast for 2002 from 3.4% to 2.1 %, and its forecast for US growth from 2.6% to 1% for next year. Japan is expected to experience 2 years’ consecutive recession. Europe is expected to see growth fall to 1.5% next year from earlier forecasts of 2.5%.

4. Shocks to Economy
The terrorist attacks came as a shock to an economy which was already showing itself vulnerable to shocks. Consumer spending has been resilient but will slow, deepening the bursting of the technology bubble. The travel and lodging industries are suffering hugely in the short run, but we expect spending in security and defense will increase.

Costs of higher security/insurance/higher inventory costs will serve as a tax on business and affect profit margins of private enterprises.

With a conceivable disruption of oil supply, energy costs could increase sharply.

5. Post cyclical trends in US Economy in the longer term
The structural imbalances in the US need to be solved. Current account deficit, high levels of debt, low household savings all need to be re-balanced. Other issues include the possible impacts on the dollar and the decrease in capital flows from elsewhere to US assets.

Lower productivity gains of less than 2% is expected as the peace dividend is dissipated. In the 1990’s, less defense/government spending enabled the US economy to put more money into private sector investment, which had improved productivity and driven growth.

Pace of globalization may slow down as the cost and risks associated with foreign investments could both increase.

The shock may become a permanent or semi permanent general caution on the part of consumers/businesses/investors - a lingering risk aversion, malaise, even though cyclical economic healing has occurred.

Implication: lower long term growth in the US, and the globe generally than has been the case in recent years.

6. Risks - Scenarios for looking at world
Two big issues we are grappling with

-- Growth and

-- Global governments/governance/political response.

Think of these forces as two Axes - Vertical axis, resumption of high growth at the top - concerted global policy action works, stimulus gets global economy back into cyclical recovery.

Other end of the axis is that this does not happen, perhaps liquidity trap growth stays low.

Horizontal axis -Governance - right end of the axis is cohesive global policy response, global community unites, coalition exists, broad general consensus forms on combating global terrorism

OR - other end of the spectrum, world breaks away into factionalism, disunity, isolationism, combative governments, unilateralism.

7. More capital flowing to China
Investment flow to the US is likely to slow down (less mergers and acquisitions by foreigners, maybe slower portfolio flows). Capital may stay at home, or flows increase to Europe and Asia for transnational acquisition and mergers. China could benefit from this and its economy is expected to maintain a growth rate of 7 % to 8 % in the next few years with its large reserve and relatively small debt. As China enters the WTO, more foreign direct investment could be expected.