Morgan Stanley just downgraded the world's economic outlook, and blames U.S. and European leaders for the mess.
In its grim prognosis of the global economy, Morgan Stanley completely ignores the Middle East countries.
So we don't know how MS really feels about the outlook of the regional economies, but here is a clue: the Middle East oil producers' biggest clients - the United States, Europe and even the hot emerging markets - have seen growth forecasts slashed by the bank.
"We cut our global GDP growth forecasts to 3.9% in 2011 and 3.8% in 2012, from 4.2% and 4.5%, respectively," notes Joachim Fels, head of Morgan Stanley's global economics research team. "DM (developed markets) 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."
Emerging markets will not escape the crunch either. Even though emerging powers will generate 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.... EM policy-makers are likely to cushion domestic growth, but drastic policy stimulus remains unlikely."
The fault lies with abject failure in policy making, leaders in the United States and Europe have failed to calm markets and soothed the frayed nerves of investors.
"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," says the bank. "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."
DANGEROUSLY CLOSE TO RECESSION
But while MS expects the global economy to teeter on the edge of a recession, it should be able to escape its evil clutches for three good reasons:
First, companies are sitting on a pile of cash and display healthy profit margins.
Second, the decline in oil prices from the peaks earlier this year should act as a partial stabiliser, lowering headline inflation over the next 6-12 months and supporting household real disposable incomes.
Third, major central banks will lend additional support, with both the ECB and the Fed cutting interest rates and possibly implementing additional non-standard easing measures.
GRIM
ECONOMIC FORECAST
| ||||||
| 2009
| 2010
| 2011
| 2012
| ||
|
|
| Old
| New
| Old
| New
|
Global
| -0.7
| 5.1
| 3.9
| 4.2
| 3.8
| 4.5
|
G10
| -3.6
| 2.6
| 1.5
| 1.9
| 1.5
| 2.4
|
| -2.6
| 3
| 1.8
| 2.6
| 2.1
| 3
|
Euro Area
| -4.1
| 1.7
| 1.7
| 2
| 0.5
| 1.2
|
| -6.3
| 4
| -0.6
| -1.2
| 1.3
| 2.9
|
| -4.9
| 1.4
| 1.2
| 1.2
| 1.4
| 1.8
|
EM
| 2.6
| 7.8
| 6.4
| 6.6
| 6.1
| 6.7
|
| 9.2
| 10.3
| 9
| 9
| 8.7
| 9
|
| 7.2
| 9
| 7.3
| 7.3
| 7.4
| 7.8
|
| -7.8
| 4
| 4.7
| 5
| 5.2
| 5.5
|
| -0.2
| 7.5
| 3.7
| 4
| 3.5
| 4.6
|
Source: Morgan Stanley Research; E = Morgan Stanley Research estimates
| ||||||
UNITED STATES: OUTLOOK DOWNGRADED
The Standard & Poor's downgrade of the United States' credit rating has already had a huge psychological impact on the American economy. It has already been evident in the stock markets and the frantic trips of Vice President Joe Biden to China to calm their fears. The shoe is clearly on the other foot.
Observing this less-confident gait, Morgan Stanley has slashed U.S. economic growth to 1.8% in 2011 from 2.6% earlier. Next year will hardly yield a bumper crop with growth inching up a mere 1.5%, compared to MS's previous forecast of 2.4%.
But the bank does not expect the Fed to launch a third tranche of quantitative easing. "Even if it does, the purchases probably wouldn't have any significant impact on our growth or inflation forecasts. However, other - more creative - policy measures could have a meaningful impact on the outlook. In particular, we believe that efforts to unclog the mortgage refinancing pipeline would have the most bang for the buck since this would involve repair of an important transmission mechanism for monetary policy."
EU: MERK-OZY MISERY
The recent efforts of German Chancellor Angela Merkel and French President Nicholas Sarkozy to calm markets has failed.
Germany--long the European growth leader--grew at a mere 0.5% in Q2, much weaker than expected, France posted no growth at all and the U.K. economy grew at 0.7% pace. All were weaker than the U.S. at 1.3% growth in the second quarter.
"Instead of 2.0%, we now expect the euro area economy to expand by only 1.7% on average this year. In addition, we are lowering our below-consensus forecast for next year to just 0.5%, down from 1.2% before," says MS. "If accurate, this would put the coming winter on par with the 2002/03 period, a period initially considered a mini-recession in Europe based on the first set of GDP data reported."
With the EU states unlikely to stage a fiscal stimulus, there is a good chance that a recession may come to the Eurozone as soon as 2012.
CEEMEA'S OIL BLUES
CEEMEA is a large diverse region, but as a whole it is expected to grow 3.9% this year (Compared to its earlier forecast of 4.2%), primarily on the back of oil prices and major weakness in European growth.
"We now assume an average oil price of US$103/bbl (based on oil futures) for 2012, which is some 10% lower that our previous assumption," says MS's Fels.
EMERGING ASIA
While Morgan Stanley has not changed its growth forecast for China (9%) and India (7.3%) for 2011, the two new economic powerhouses have seen their growth estimates lowered for 2012.
Regional giants China, India and Russia all show better resilience than their respective regions, with growth now lower by 0.3%, 0.4% and 0.3%, respectively than previously expected. Growth in Brazil, however, has been marked down from 4.6% to 3.5% in 2012, a little lower than the downgrade for the region as a whole.
IS THERE A SILVER LINING?
It must be said that Morgan Stanley has been bearish in its assessment throughout the global recovery over the past few years. The one silver lining in its very dark prediction is that corporate profits are in a far better position than they were in 2008 during the depression. But at that time, policymakers had the ammunition and political will to initiate stimulus programmes.
But similar stimulus policies will be difficult to launch this time around. With the presidential election fever rising in the United States, and the ECB straining to support failing member countries, policymakers seem to be short on answers if they find themselves in a full-blown recession once again. No wonder Morgan Stanley's forecast is so grim.
© alifarabia.com 2011
