Morgan Stanley Just Slashed Its US GDP Forecast And Warned Things Could Get A Lot Worse

vincent reinhartVincent Reinhart

Photo: CNBC

Vincent Reinhart and Morgan Stanley’s US Economics team just cut their forecast on the U.S. economy.For 2012, they see the economy growing 2.0 per cent, down from an earlier forecast of 2.3 per cent.  For 2013, they see the growth decelerating to 1.7 per cent, down from 2.0 per cent.

From the note, hot off the press:

Rising uncertainty tied to the fiscal cliff confronting the US and an intensification of the European debt crisis have triggered a significant tightening in US financial conditions over the past few months. Moreover, these developments appear to have contributed to deterioration in the incoming economic data. As a result, we are cutting our second half GDP growth forecast to show no acceleration relative to the estimated +2% or so pace seen in the first half of the year. And, with less forward momentum than previously thought heading into late 2012, the vulnerability of the US economy to some fiscal drag in early 2013 should be more pronounced, leading us to cut our GDP forecast for next year to 1 3/4% from 2%.

And things could get a lot worse.

In addition to European risks, a potential 5% of GDP fiscal tightening in calendar year 2013 would almost certainly cause a recession if implemented. While it is likely that legislation will eventually be enacted to avoid the full impact of the fiscal cliff, it’s quite possible that we will see a repeat of the scenario that played out last summer when Congress dragged their heels in hiking the debt ceiling and US sovereign debt was downgraded.

We are inching closer and closer to fiscal cliff-mageddon.

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