Concerns over the wavering US economy and Eurozone debt crisis has put world markets in turmoil and most of them witnessed massive sell-offs in the past week. Excerpts from a Morgan Stanley research report dated 17 August 2011.
Recent economic events in the US and Europe have been disappointing. Europe's insufficient response to the sovereign crisis and the events around lifting the US debt ceiling have negatively impacted the financial markets and substantially eroded business and consumer confidence. In the first half of 2011, US GDP grew by an annual average rate of less than 1%, which shows brittleness of the US recovery in the face of external shocks (oil, Japan earthquake) despite ongoing fiscal stimulus.
On the other hand, Europe's past rate hikes, the sovereign crisis and the fiscal policy tightening will take a toll on its growth. The euro area GDP is likely to stagnate later this year and in early 2012. Because of such developments, Morgan Stanley has reduced its global growth forecasts to 3.9% from 4.2% for 2011 and from 4.5% to 3.8% for 2012. The report also lists the outlook for various regions.
United States: The growth expectations are downgraded because of expected slower pace of income and spending growth. Also, there are concerns regarding the willingness of businesses to hire and invest.
Euro area: The GDP growth estimates are reduced by a full percentage point for this year and the next year owing to softening domestic demand in the core countries. This could affect the euro area as a whole, slowdown in global trade momentum marked by deceleration in manufacturing indicators, difficulties faced by banks in accessing term funding at reasonable rates and likelihood of increased funding costs that could impact investment projects.
United Kingdom: UK will follow a pattern of weak (but positive) growth. Its export led recovery is likely to be hit due to global slowdown. Also, lack of spare capacity and pressure from global inflation will make 2012 another uncomfortable year for the Bank of England.
Japan: Morgan Stanley has reduced the country's economic prospects due to weakening global economy, a delay in post-quake reconstruction activities and tighter electricity demand-supply conditions over the medium-to-long term. The main downside risks are deflation, concerns regarding fiscal resources and higher taxes.
Australia: There are growing signs of weakness across the non-mining related sectors due to restrictive monetary and fiscal policy and adverse wealth effects as house prices are falling. Also, consumer sentiment has deteriorated significantly in recent months, which could raise the prospects of higher unemployment.
Asia (ex-Japan): The report has reduced the GDP growth estimates for the region to 7.6% in 2011 and 7.3% in 2012, from 7.7% and 7.8%, respectively. The region is likely to decelerate due to a significant slowdown in the developed world growth.
According to the report, countries which are more externally oriented, such as Korea, Singapore, Malaysia, Taiwan and Thailand, will see a greater adjustment in their growth outlook compared with the economies with higher dependence on domestic demand, such as China, India and Indonesia.
