Grim commentary from Morgan Stanley’s economics team lead by Joachin Fels.The outlook for growth is slashed everywhere around the world:
We cut our global GDP growth forecasts to 3.9% in 2011 and 3.8% in 2012, from 4.2% and 4.5%, respectively. DM growth looks set to average only 1.5% this year and next (down from 1.9% and 2.4% previously), making the BBB recovery even more bumpy, below-par and brittle.
EM isn’t immune, but generates 80% of global growth: We now see EM growth decelerating from 7.8% in 2010 to 6.4% (6.6% previously) this year, and further to 6.1% (6.7%) in 2012. Given its 50% (PPP) weight in global GDP, EM generates 80% of global GDP growth. EM policy-makers are likely to cushion domestic growth, but drastic policy stimulus remains unlikely.
Why have things turned so bad?
A policy-induced slowdown: The main reasons for our growth downgrade, apart from disappointing incoming data, are recent policy errors in the US and Europe plus the prospect of further fiscal tightening there in 2012. This is eroding business and consumer confidence and has weighed down on financial markets. A negative feedback loop between weak growth and soggy asset markets now appears to be in the making.
Ultimately, they see the US and EU as hovering “dangerously close” to recession territory:
Dangerously close to recession, but not our base case: Our revised forecasts show the US and the euro area hovering dangerously close to a recession – defined as two consecutive quarters of contraction – over the next 6-12 months. It won’t take much in the form of additional shocks to tip the balance. Still, recession is not our base case because: i) the corporate sector looks healthy; ii) household real incomes will be supported by lower headline inflation; and iii) we expect more action from central banks, including rate cuts and more non-standard easing from the Fed and the ECB.