MORGAN STANLEY: This Is What The Euro Economy Will Do In 2012 And 2013

euro

Morgan Stanley’s Global Economics Team led by Joachim Fels recently released their updated global economic outlook for 2012 and 2013.

“[W]e cut our 2012 global GDP forecast further from 3.8% to 3.5%, taking growth below its long-term average,” said the analysts. “Our biggest downward revisions are in the euro area, where we think the economy has now entered recession.”

Included in their report is a detailed forecast for the euro area economy.  Regarding their base case scenario:

Our base case assumes that European governments make a big step towards fiscal integration soon that stabilizes confidence, and that US Congress extends most of this year’s stimulus. Against the backdrop of recent policy mistakes, these assumptions may seem heroic. Failure on these fronts would risk a full-blown recession in the US and Europe, with global GDP growth falling below the 2.5% recession threshold. And if the euro were to break up (still a tail event, in our view, but a fatter one) the Great Recession of 2008/09 would pale in comparison to what would unfold, in our view.

The full report provides a detailed break-down of base, bear, and bull case scenarios for the Euro area economy.

The Euro area economy is expected to contract in 2012, only to be followed by anemic growth for years to come

GDP Growth

  • 2011: 1.6%
  • 2012: -0.2%
  • 2013: 0.9%
  • 2014 - 2018: 1.4%

Source: Morgan Stanley

Personal consumption will slow with the economy

Private Consumption Growth

  • 2011: 0.7%
  • 2012: 0.2%
  • 2013: 0.5%

Source: Morgan Stanley

Capital expenditures will dip

Gross Fixed Investment Growth

  • 2011: 2.1%
  • 2012: -1.5%
  • 2013: 0.5%

Source: Morgan Stanley

Government spending will pull back thanks to austerity measures

Government Consumption Growth

  • 2011: 0.5%
  • 2012: -0.2%
  • 2013: -0.2%

Source: Morgan Stanley

Prices are expected to decline, making room for monetary easing

Inflation

  • 2011: 2.7%
  • 2012: 1.5%
  • 2013: 1.3%

Core-Inflation

  • 2011: 1.4%
  • 2012: 1.1%
  • 2013: 1.2%

Source: Morgan Stanley

However, income won't keep up with inflation

Real Disposable Income Growth

  • 2011: 0.2%
  • 2012: -0.1%
  • 2013: 0.5%

Source: Morgan Stanley

The savings rate will inch lower

Personal Saving Rate

  • 2011: 12.4%
  • 2012: 12.2%
  • 2013: 12.1%

Source: Morgan Stanley

Meanwhile, the unemployment rate will continue to climb

Unemployment Rate

  • 2011: 10.1%
  • 2012: 11.0%
  • 2013: 11.2%

Source: Morgan Stanley

Government debt will outpace GDP

General Gov't Debt (% of GDP)

  • 2011: 88.2%
  • 2012: 91.0%
  • 2013: 92.2%

Source: Morgan Stanley

The ECB is expected to cut rates soon, while German yields are projected to rise

ECB Policy Rate

  • 2011: 1.00%
  • 2012: 0.50%
  • 2013: 1.25%

10-Year German Bund Yield

  • 2011: 1.75%
  • 2012: 2.20%
  • 2013: 3.00%

Source: Morgan Stanley

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