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Morgan Stanley’s Joachim Fels and the rest of the The Global Macro Analyst team have cut their global growth forecast in a note dramatically titled Into The Twilight Zone.The gist is that everyone in the world is struggling right now.
Emerging markets, which used to keep growing solidly during times of slowdown, are sputtering. And developed markets keep shooting themselves in the foot.
The global economy has sunk deeper into the twilight zone that divides sustainable recovery from renewed recession. We have sharply cut our growth forecasts (in many cases, again) for most countries and regions around the globe over the past three weeks.
We now expect only 3.2% global GDP growth in 2012 and 3.5% in 2013, half a point lower in each year than when our forecasts peaked in March. Cuts are bigger in EM than in DM; EM cuts stem from extremely weak incoming data, while DM cuts reflect a poor outlook in 2H12 and 2013.
Why? Policy uncertainty and broken EM growth models:
Two main reasons for our cuts: i) the rise in policy uncertainty, mainly in the US, Europe and Japan; ii) more signs that traditional EM growth models are broken and the transition to new models is sputtering.
While “policy uncertainty” is something you associate a lot with the US (elections, fiscal cliff, etc.) Fels notes that it’s being seen elsewhere. Japan looks to have elections soon, and the makeup of power could be totally different. And Europe is well, Europe.
On the emerging markets front, the story is about broken growth models, and a reluctance to pursue structural reforms:
Still pursuing the old growth models: Part of the reason that policy action has been slow to come is that EM policy- makers have also constrained themselves by continuing to pursue the old model. How? The aggressive easing of 2009 exacerbated the internal imbalances by stimulating investment
in China, consumption in India and commodity production in commodity-exporting economies, which meant that more resources were allocated to strategies with falling returns. As a result, policy-makers have overextended themselves on some fronts – think of China’s high credit/GDP ratio thanks to
the loan surge in 2009 that pushed investment higher, or India’s fiscal deficit that widened as consumption was encourage, or the wasted easing in commodity-exporting economies that simply encouraged commodity production without helping the rest of the manufacturing sector. When
policy-makers ease this time, and they can and will, they will have to carefully avoid these ill-directed measures.
So there you have it. Everyone is in bad shape.