And so the last true blue, and much ridiculed economics team, that of Morgan Stanley's David Greenlaw's and his merry Buryini-ruler clad automatons, has waved the white flag. Specifically, in an email sent out yestrday by the firms' overabundant and soon redundant salespeople, both institutional and retail, we read: "WE HAVE BEEN ARGUING FOR A STRONGER 2H US ECONOMY..AND WE ARE CAPITULATING..." The all caps comes from them lest someone accuses us of being overly dramatic.
US ECONOMY: Late today our global economics team published the piece below downgrading their view on global growth (See piece below). The note revising US growth prospects is attached as well. Specifically, they see US GDP expanding at a sub-3% pace during 2H, and moderating to a 2.25% pace over the four quarters of 2012. They also highlight a 30% chance of a US recession. The views are intended to dovetail with the recent note from the Global Cross-Asset Strategy team where they noted a more balanced tactical outlook globally on risk assets near term, as well as heightened worry on structural challenges over the longer term ("Cross-Asset Navigator - And For the Next Trick...", August 12, 2011).
GLOBAL ECONOMY: We cut our global GDP growth forecasts to 3.9% in 2011 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 more bumpy, below-par and brittle.
EM GROWTH: EM isn’t immune, but generates 80% of global growth: We now see EM growth decelerating from 7.8% in 2010 to 6.4% (6.6% previously) this year, and further to 6.1% (6.7%) in 2012. Given its 50% (PPP) weight in global GDP, EM generates 80% of global GDP growth. EM policy-makers are likely to cushion domestic growth, but drastic policy stimulus remains unlikely.
Dangerously close to recession, but not our base case: 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 6-12 months. It won’t take much in the form of additional shocks to tip the balance. Still, recession is not our base case because: i) the corporate sector looks healthy; ii) household real incomes will be supported by lower headline inflation; and iii) we expect more action from central banks, including rate cuts and more non-standard easing from the Fed and the ECB.
Why, did Morgan Stanley, as usual about 2 weeks behind the curve, just come to Goldman's realization that for bonuses to be paid, the Fed must proceed with QE3, which in turn needs a major market flush to be activated?
The full report which will be absolutely not market movingDangerously Close to Recession