Morgan Stanley has cut its global growth forecast for 2011 and 2012, saying the United States and euro zone are dangerously close to a recession".
The bank cut its global gross domestic product growth forecast to 3.9 per cent from 4.2 per cent for 2011, and to 3.8 per cent from 4.5 per cent for 2012.
It also criticised policymakers in Washington and Europe for not acting more decisively to contain the sovereign debt crisis.
"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 six-12 months," Joachim Fels, who co-heads Morgan Stanley's global economics team, said in a research note yesterday.
That was not the bank's base case scenario, he said, 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 ECB could try to loosen policy further.
Still, "it won't take much in the form of additional shocks to tip the balance," he added.
"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 on Tuesday 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.
"Recent policy errors - especially Europe's slow and insufficient response to the sovereign crisis and the drama around lifting the US debt ceiling - have weighed down on financial markets and eroded business and consumer confidence," the Morgan Stanley note said.
Growth will also be hit by the prospect of fiscal tightening in the United States and Europe where politicians are trying to appease markets by reining in public spending, it added.
It said it now sees growth in developed market economies averaging only 1.5 per cent this year and next, down from his previous view of 1.9 per cent and 2.4 per cent, respectively.
Growth in emerging market economies will slow to 6.4 per cent this year from 7.8 per cent in 2010, Mr Fels estimated.
This means that emerging market economies - which now account for half of global GDP - will generate 80 per cent of the global GDP growth that Morgan Stanley is forecasting for 2011 and 2012, Mr Fels said.
Most economists say they are not cutting their growth forecasts for emerging Asia for now, as the continent is less dependent on exports to Western markets than it was when the financial crisis hit in 2008.
Morgan Stanley left its 2011 growth forecast for China unchanged at 9 per cent, versus 10.3 per cent last year, but pulled back growth expectations slightly for Russia and Brazil.
If the West does slump back into recession, or a prolonged period of meagre 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 programme.
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.
Reuters
