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MORGAN STANLEY RESEARCHGLOBAL ECONOMICS
Morgan Stanley & Co. Internationalplc
Joachim Fels
Joachim.Fels@morganstanley.com+44 (0)20 7425 6138
Manoj Pradhan
Manoj.Pradhan@morganstanley.com+44 (0)20 7425 3805
Global Economics Team
Global
August 17, 2011
Global Economics
Dangerously Close toRecession
We cut our global GDP growth forecasts to 3.9% in2011 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 morebumpy, below-par and brittle.
EM isn’t immune, but generates 80% of globalgrowth:
We now see EM growth decelerating from 7.8%in 2010 to 6.4% (6.6% previously) this year, and furtherto 6.1% (6.7%) in 2012. Given its 50% (PPP) weight inglobal GDP, EM generates 80% of global GDP growth.EM policy-makers are likely to cushion domestic growth,but drastic policy stimulus remains unlikely.
A policy-induced slowdown:
The main reasons forour growth downgrade, apart from disappointingincoming data, are recent policy errors in the US andEurope plus the prospect of further fiscal tighteningthere in 2012. This is eroding business and consumerconfidence and has weighed down on financialmarkets. A negative feedback loop between weakgrowth and soggy asset markets now appears to be inthe making.
Dangerously close to recession, but not our basecase:
Our revised forecasts show the US and the euroarea 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 theform of additional shocks to tip the balance. Still,recession is not our base case because: i) thecorporate sector looks healthy; ii) household realincomes will be supported by lower headline inflation;and iii) we expect more action from central banks,including rate cuts and more non-standard easing fromthe Fed and the ECB.
Why this is not 2008:
Initial conditions are better now – household, corporate and bank balance sheets weremuch weaker, monetary policy was tight, and theLehman collapse meant that the financial system totallyseized up. Any plausible recession scenario in 2011-12should be much shallower than in 2008-09
.
Revising Down Global GDP Growth
2009 2010 2011E 2012E% New Old New Old
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
United States -2.6 3.0 1.8
2.6
2.1
3.0
Euro Area -4.1 1.7 1.7
2.0
0.5
1.2
Japan -6.3 4.0 -0.6
-1.2
1.3
2.9
UK -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
China 9.2 10.3 9.0
9.0
8.7
9.0
India 7.2 9.0 7.3
7.3
7.4
7.8
Russia -7.8 4.0 4.7
5.0
5.2
5.5
Brazil -0.2 7.5 3.7
4.0
3.5
4.6
Source: Morgan Stanley Research; E = Morgan Stanley Research estimates
Contents PageGlobal Overview:
Dangerously Close toRecession2
US:
Downgrading Our Growth Expectation 6
Euro Area:
Growth Coming to a Standstill 7
UK:
Slower Recovery, Later Rate Rises 8
Japan:
Material 2012 GDP Downgrade 8
Australia:
Growing Signs of Weakness 9
CEEMEA:
Euro Spillovers Trigger GrowthDowngrade9
Asia ex-Japan:
Continued Caution 10
Latin America:
Risks to Abundance 11
MORGAN STANLEY RESEARCHAugust 17, 2011Global EconomicsDangerously Close to Recession
Dangerously Close to Recession
Joachim Fels (44 20) 7425 6138Manoj Pradhan (44 20) 7425 3805
Ever more BBB:
We are cutting our global GDP growthforecasts by a combined full percentage point in 2011-12, to3.9% from 4.2% in 2011, and to 3.8% from 4.5% in 2012 (seeExhibit 1). We now see growth in the developed market (DM)economies averaging only 1.5% this year and next (downfrom 1.9% and 2.4% previously) – markedly more sluggishthan the 20-year trend growth rate in DM of 2.3%, and morethan a full percentage point below the 2.6% rate in 2010 whenthe world rebounded from the Great Recession. While we hadbeen calling for a BBB recovery in DM all along, the path nowlooks even more bumpy, below-par and brittle than previouslythought.
Exhibit 1
Revising Down Global GDP Growth
2009 2010 2011E 2012E% New Old New Old
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
United States -2.6 3.0 1.8
2.6
2.1
3.0
Euro Area -4.1 1.7 1.7
2.0
0.5
1.2
Japan -6.3 4.0 -0.6
-1.2
1.3
2.9
UK -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
China 9.2 10.3 9.0
9.0
8.7
9.0
India 7.2 9.0 7.3
7.3
7.4
7.8
Russia -7.8 4.0 4.7
5.0
5.2
5.5
Brazil -0.2 7.5 3.7
4.0
3.5
4.6
Source: Morgan Stanley Research; E = Morgan Stanley Research estimates
EM isn’t immune, but generating 80% of global growth:
The great EM-DM growth divide continues, but EM economieswon’t be immune to the DM slowdown, in our view. We nowsee EM growth decelerating from 7.8% in 2010 to 6.4% thisyear (6.6% previously), and further to 6.1% (6.7%) in 2012.While this keeps EM GDP cruising above its 20-year trendrate of 5%, it implies a significant further cooling of growthcompared to last year’s bonanza. Remarkably, despiteslowing growth, EM economies – which now account for halfof global GDP (using PPP weights) – will generate fully 80%of global GDP growth we are forecasting for 2011-12 (seeExhibit 2).
A policy-induced slowdown:
There are three main reasonsfor our downgrade. First, the recent incoming data, especiallyin the US and the euro area, have been disappointing,suggesting less momentum into 2H11 and pushing down full-year 2011 estimates. Second, recent policy errors – especiallyEurope’s slow and insufficient response to the sovereign crisisand the drama around lifting the US debt ceiling – haveweighed down on financial markets and eroded business andconsumer confidence. A negative feedback loop betweenweak growth and soggy asset markets now appears to be inthe making in Europe and the US. This should be aggravatedby the prospect of fiscal tightening in the US and Europe.
Exhibit 2
EM Now Generates 80% of Global GDP Growth
Global real GDP growth, %-2-101234567
1 9 7 0 1 9 7 2 1 9 7 4 1 9 7 6 1 9 7 8 1 9 8 0 1 9 8 2 1 9 8 4 1 9 8 6 1 9 8 8 1 9 9 0 1 9 9 2 1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0 2 0 1 2
DM ContributionEM ContributionPre-Revision GlobalPeriod AverageMSfcast
Note: Shaded areas indicate recessionsSource: IMF, Haver Analytics, Morgan Stanley Research estimates
US and Europe dangerously close to recession:
Ourrevised forecasts show the US and the euro area hoveringdangerously close to a recession – defined as twoconsecutive quarters of contraction – over the next 6-12months. The US growth disappointment in 1H11, when GDPadvanced by an annual average rate of less than 1%,illustrates the brittleness of the US recovery in the face ofexternal shocks (oil, Japan earthquake), despite ongoing QE2and fiscal stimulus at the time. While the current quartershould still show some rebound in growth to around 3% fromthe very low bar in 1H, much of this rebound is likely due totemporary factors such as the ramping up of auto productionas supply disruptions from the Japan situation ease. The mostcritical period for the US economy will likely be 4Q11, whenwe may see some fallout from the heightened volatility of riskmarkets, and 1Q12, when we get an automatic tighteningfiscal policy if, as our US team currently assumes, this year’sfiscal stimulus measures will expire (for more details, seepage 6).
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MORGAN STANLEY RESEARCHAugust 17, 2011Global EconomicsDangerously Close to Recession
Exhibit 3
US GDP Growth: Critical Period Ahead in 4Q11/1Q12
US GDP growth-10%-8%-6%-4%-2%0%2%4%6%
Q 1 - 2 0 0 6 Q 3 - 2 0 0 6 Q 1 - 2 0 0 7 Q 3 - 2 0 0 7 Q 1 - 2 0 0 8 Q 3 - 2 0 0 8 Q 1 - 2 0 0 9 Q 3 - 2 0 0 9 Q 1 - 2 0 1 0 Q 3 - 2 0 1 0 Q 1 - 2 0 1 1 Q 3 - 2 0 1 1 Q 1 - 2 0 1 2 Q 3 - 2 0 1 2
QoQ%, SAARYoY%MS fcast
Source: BEA, Haver Analytics, Morgan Stanley Research estimates
Europe’s woes to continue:
The ECB’s past rate hikes and,more so, the sovereign crisis and the additional fiscal policytightening as well as the banking sector funding stress itproduces, will take an additional toll on growth, in our view.Our European team now sees euro area GDP broadlystagnating later this year and in early 2012. Thus, it won’t takemuch to tip the balance towards recession, especially as afinal resolution of the debt crisis (in the form of fiscal transfersor common bond issuance) is likely to be very slow in coming.Against this backdrop, our European team has slashed itsalready below-consensus 2012 euro area GDP forecast from1.2% to a mere 0.5% (see page 7). In our view, despite theproblems in the US, the euro area is clearly the weakest linkin the global chain.
Exhibit 4
Euro Area GDP to Stagnate in 4Q11/1Q12
Euro Area GDP growth-12%-10%-8%-6%-4%-2%0%2%4%6%
Q 1 - 2 0 0 6 Q 3 - 2 0 0 6 Q 1 - 2 0 0 7 Q 3 - 2 0 0 7 Q 1 - 2 0 0 8 Q 3 - 2 0 0 8 Q 1 - 2 0 0 9 Q 3 - 2 0 0 9 Q 1 - 2 0 1 0 Q 3 - 2 0 1 0 Q 1 - 2 0 1 1 Q 3 - 2 0 1 1 Q 1 - 2 0 1 2 Q 3 - 2 0 1 2
QoQ%, SAARYoY%MS fcast
Source: Eurostat, Haver Analytics, Morgan Stanley Research estimates
Dangerously close to recession, but not our base case:
While we think that the US and the euro area will bedangerously close to recession over the next several quarters,we are not making recession our base case, for threereasons. First, companies are sitting on a pile of cash anddisplay healthy profit margins. Second, the decline in oil pricesfrom the peaks earlier this year should act as a partialstabiliser, lowering headline inflation over the next 6-12months and supporting household real disposable incomes.Third, we expect the major central banks to lend additionalsupport, with both the ECB and the Fed cutting interest ratesand possibly implementing additional non-standard easingmeasures (for details, see pages 6-7).
Why this is not 2008:
Initial conditions are better now. Backthen, household, corporate and bank balance sheets weremuch weaker, employment in the US was already falling andunemployment rising, monetary policy was tight, and theLehman collapse meant that the financial system, includingtrade finance, totally seized up. Against this, fiscal andmonetary policy have less (though not zero) room formanoeuvre now. So, while a freefall of the economy similar to2008 looks very unlikely, policy also has less potential for ashock-and-awe response, if needed. Surely, we should nottake too much comfort from saying that this is not 2008 – afterall, the recession that followed was the deepest since theGreat Depression. However, it is important to point out that aplausible recession scenario in 2011-12 would be muchshallower than the 2008-09 experience. To get a 2008-typerecession, one would have to assume a major Lehman-typepolicy error, such as the default of a European sovereign,which could bring the whole financial system down. While thisis not impossible, we currently attach a very low probability tosuch an outcome. We will elaborate more on bear and bullscenarios in the coming weeks as events evolve.
EM policy-makers to cushion the blow:
The currentslowdown in EM growth, caused by a run-up in inflation andthe monetary policy response, now looks set to be prolongedinto 2012 by the weaker DM outlook. However, with inflationat or close to a temporary peak, some policy easing in EMlooks likely to provide a cushion for growth. EM policy-makersshould be able and willing to help their own economies avoida hard landing, but they won’t be able to bail out the world, inour view. Absent the kind of tail risks that were present in theworld in 2008, and having barely emerged from a battle withinflation and overheating, EM policy-makers at this point willlikely signal that they want to use just enough policy stimulusto help their own economies. In fact, given the constraints onDM policy-makers, EM policy-makers should really be ready
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