Earlier we mentioned Morgan Stanley’s call that the US and Europe are hovering “dangerously close” to a recession.But MS does not believe it’s 2008 all over again.
Why this is not 2008: Initial conditions are better now. Back then, household, corporate and bank balance sheets were much weaker, employment in the US was already falling and unemployment rising, monetary policy was tight, and the Lehman collapse meant that the financial system, including trade finance, totally seized up. Against this, fiscal and monetary policy have less (though not zero) room for manoeuvre now. So, while a freefall of the economy similar to 2008 looks very unlikely, policy also has less potential for a shock-and-awe response, if needed. Surely, we should not take too much comfort from saying that this is not 2008 – after all, the recession that followed was the deepest since the Great Depression. However, it is important to point out that a plausible recession scenario in 2011-12 would be much shallower than the 2008-09 experience. To get a 2008-type recession, one would have to assume a major Lehman-type policy error, such as the default of a European sovereign, which could bring the whole financial system down. While this is not impossible, we currently attach a very low probability to such an outcome. We will elaborate more on bear and bull scenarios in the coming weeks as events evolve.