Morgan Stanley Cuts Global Growth Forecast With U.S. ‘Close’ to Recession

Morgan Stanley cut its forecast for global growth this year, citing an “insufficient” policy response to Europe’s sovereign debt crisis, weakened confidence and the prospect of fiscal tightening.

The bank estimates expansion of 3.9 percent, down from a previous forecast of 4.2 percent, according to an e-mailed report dated today. Morgan Stanley cut its China growth forecast for next year and Deutsche Bank AG reduced its estimates for the nation for 2011 and 2012.

The threat to the global economy from the debt burdens of developed nations from the U.S. to Europe has roiled world markets this month and wiped trillions of dollars off the value of equities. At the same time, slowing expansions in countries including Germany, the key driver of European growth, are hurting confidence.

The U.S. and Europe are “dangerously close to recession,” Morgan Stanley analysts including Chetan Ahya said in the note. “Recent policy errors, especially Europe’s slow and insufficient response to the sovereign crisis and the drama around lifting the U.S. debt ceiling, have weighed down on financial markets and eroded business and consumer confidence.”

The MSCI All-Country World Index slid 0.7 percent to 305.64 as of 4:24 p.m. in Hong Kong, set for the steepest drop since Aug. 10.

‘Stagnating’ Economies

In the euro area, “broadly stagnating” growth later this year and in early 2012 will mean that “it won’t take much to tip the balance towards recession, especially as a final resolution of the debt crisis -- in the form of fiscal transfers or common bond issuance -- is likely to be very slow in coming,” the Morgan Stanley economists wrote.

The bank cut an estimate for China’s growth next year to 8.7 percent from 9 percent. Deutsche Bank trimmed a prediction for this year to 8.9 percent from 9.1 percent, and a forecast for 2012 to 8.3 percent from 8.6 percent, in a report dated yesterday.

“In the near term, the single most important shock to the Chinese economy will be the likely slowdown -- or even recession -- of the EU and U.S. economies,” Deutsche Bank economist Ma Jun said in a note.

Hong Kong will have a “shallow recession” with the economy contracting in the third quarter from the previous three months after already shrinking in the second quarter, Morgan Stanley said in another e-mailed note today.

“Western demand will shrink as they need to tighten their fiscal policies,” Chinese Commerce Minister Chen Deming said in Hong Kong yesterday.

Merkel, Sarkozy

German Chancellor Angela Merkel and French President Nicolas Sarkozy this week ruled out steps such as the issuance of euro bonds or expanding a bailout fund to counter the European debt crisis. Pacific Investment Management Co., the world’s biggest bond fund manager, said that European politicians should let Greece, Ireland and Portugal default while taking steps to ensure Italy and Spain won’t.

Morgan Stanley cut its estimate for growth in the Group of 10 nations to 1.5 percent this year and next, down from previous forecasts of 1.9 percent in 2011 and 2.4 percent in 2012, today’s report showed.

“A negative feedback loop between weak growth and soggy asset markets now appears to be in the making in Europe and the U.S.,” the analysts said. “This should be aggravated by the prospect of fiscal tightening in the U.S. and Europe.”

France’s growth stalled in the second quarter, while the German economy gained 0.1 percent from the first quarter. In the U.S., the Federal Reserve has pledged to keep interest rates at a record low through mid-2013, indicating that the world’s biggest economy will continue to need support.