Reuters reported that Morgan Stanley slashed its global growth forecast for 2011 and 2012, saying that the US and the euro zone were dangerously close to a recession, and criticized policymakers in Washington and Europe for not acting more decisively to contain the sovereign debt crisis. The bank cut its global gross domestic product growth forecast to 3.9% from 4.2% for 2011 and to 3.8% from 4.5% for 2012.
Mr Joachim Fels, who co heads Morgan Stanley's global economics team, said in a research note that "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 to 12 months."
He added that it was not the bank's base case scenario, noting the corporate sector still looked healthy and lower inflation will ease pressure on consumers' pocketbooks, while central banks such as the Federal Reserve and European Central Bank could try to loosen policy further.
Mr Fels said that "Still, it won't take much in the form of additional shocks to tip the balance. A negative feedback loop between weak growth and soggy asset markets now appears to be in the making in Europe and the US."
Germany reported that its economic growth came close to stalling in the second quarter, while data from France last week showed its growth had ground to a halt, raising questions over how much drive can be expected from Europe's top economies. The clouded growth outlook puts further pressure on European politicians who have been haggling over ways to stop the euro zone's sovereign debt crisis from engulfing larger member countries such as Spain and Italy.
Analysts warn that political wrangling and failure to deliver any concrete pledges to increase the size of Europe's rescue fund risks a renewed attack on heavily indebted countries and a further blow to business and consumer confidence. The US economy also stumbled badly in the first half and came dangerously close to contracting in the first quarter. High unemployment, a bruising political battle in Washington over the debt ceiling and spending cuts in July and a stock market slump all helped push US consumer sentiment to its lowest level in more than 30 years.
Morgan Stanley left its 2011 growth forecast for China unchanged at 9% versus 10.3% in 2010, but dialed back growth expectations slightly for Russia and Brazil. If the West does slump back into recession, or a prolonged period of meager growth, analysts say China may not be in a position to reprise its role in supporting the global economy as it did in 2008, when it announced a massive stimulus program.
Inflation unexpectedly quickened in China in July, putting pressure on the central bank to keep prices in check with more interest rate rises even as its robust growth showed signs of cooling.
(Sourced from www.reuters.com)
