Morgan Stanley thinks everyone else is too bullish on the world

Morgan Stanley analysts are more bearish on the global economy than everyone else.

“We expect global growth to be below consensus estimates in 2H16 and 2017,” the firm’s Chetan Ahya wrote in the Global Macro Summer Outlook published on Sunday.

They estimate a slowdown to 2.9% annual growth in 2016, worse than the consensus call for 3.1%. Their call for an improvement to 3.2% next year is not as high as the 3.6% pace others estimate.

Global growth would continue to be sluggish, the team predicts, as it has been since the financial crisis when growth has averaged around 3% per year. Ahya and team forecast that next year, emerging-market growth would accelerate for the first time in four years in 2017, while developed-market growth would slow.

Developed markets have been supported this year by strong consumer spending. But cracks are starting to show in the form of slower business spending, which is already lower than the historical norm.

Additionally, uncertainty about the direction of politics — including Britain’s exit from the EU and the US elections — is likely to be a drag on developed-market growth.

“We expect DM growth to decelerate from 1.9%Y in 2015 to 1.4%Y in 2016 and further to 1.2%Y in 2017,” Ahya wrote.

“The slowdown in domestic demand in the initial quarters should be more concentrated in capex spending.”

Morgan Stanley thinks this slowdown in spending would eventually hit the labour market, dampening consumer spending, which has been the most important driver of growth in 2016.

Meanwhile, Ahya expects DM central banks to continue supporting their economies, with the Federal Reserve reluctant to raise rates through next year. And, the European Central Bank is forecast to cut the deposit rate by 0.5 percentage points in the third quarter.

“Reflecting the multiple headwinds buffeting the global economy, we expect global growth to decelerate in 2H16 and remain relatively subdued until 1Q17,” the note said.

“Thereafter, a stabilisation in economic activity in EM excluding China and most prominently in Brazil and Russia, where we expect the recession to end in 2016 and to have transitioned to modest, positive growth, should help to lift global growth.”

Emerging-market economies are still expected to post modest growth. Morgan Stanley’s call is based on the expectation that heavy commodity exporters would see some improvement after a rough patch.

“In 2017, emerging-market growth accelerates for the first time in four years while DM growth decelerates,” Ahya said. “We think the market is too optimistic on DM’s growth outlook.”

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