Global Recession Risk – Although economists have done much to quell fears about a global recession, Morgan Stanley is taking a step back and saying that the risk of one occurring has now increased. In fact, they’re now attaching a 30% probability of it and cutting their global forecasts as they are no longer expecting gross domestic product growth to accelerate this year.
Higher global recession risk
In a report dated March 13 titled “Global Macro Outlook: Lower Growth, Higher Risks,” Morgan Stanley economist Elga Bartsch and team said they expect growth in developed markets to slow on the back of a 3% stable global growth rate. They believe the U.S. will lead the slowdown in growth this year and that Russia and to a lesser extent, India, will lead a stabilization in growth in emerging markets.
While they now assign a higher probability of a global recession occurring, they don’t think it will happen this year. Their biggest concerns are low oil prices and easing monetary growth—two factors they see as having widespread implications for global growth.
Central banks strive for inflation
The world’s central banks are trying just about everything to bring inflation back, but the Morgan Stanley team doesn’t expect it to return until 2018. They note the recent movements in commodity prices and currencies, which have caused them to cut their headline inflation estimates for developed markets in half for the full year. They’re estimate for core inflation is also lower now but “a lot less so,” and as a result, they don’t think central banks in developed markets will reach their targets for inflation by the end of next year as they aim to do.
They add that the story is more mixed in emerging markets with commodity exporting markets seeing yet another sudden increase in pricing pressure and commodity importing markets struggling against disinflation.
Too accommodating?
The Morgan Stanley team is also changing their policy calls for some of the most influential central banks in the world. Interestingly, they’re moving to just one interest rate hike from the U.S. Federal Reserve this year, and that not until toward the end of the year. The current consensus is for one Fed rate hike in June and another later in the year, so this call is a divergence from what most economists are expecting.
They predict that the European central bank will move even further into negative interest rate territory, cutting rates by another 10 basis points to bring the deposit rate to -50 basis points in the third quarter. They believe the Bank of Japan will cut 20 more basis points off interest rates there before the elections in July and they expect the People’s Bank of China and the Reserve Bank of India to push off easing later than expected previously.
Data argues against global recession risk
They do note that there’s a mounting pile of data points which argue against a deepening risk of global recession, like the fact that consumer spending remains strong.
Also while oil prices are stabilizing, they’re still rather weak, and other data points, like manufacturing PMI and global trade, remain close to recession levels.
As a result, they warn that monetary stimulus will probably become less and less effective, adding that policy and structural reform become even more important because of this.
And despite the growing data suggesting that we won’t see a global recession soon, the Morgan Stanley team points out that the world’s economy is still fragile and remains in low-growth mode and thus is very susceptible to shocks. For example, they said any signs that the Fed, European central bank or Bank of Japan are losing control would be a great shock to the system. Other risks include the conflict in the Middle East, the refugee crisis in Europe, Brexit, and other political risks.
