Morgan Stanley cuts global growth forecast

afr.com Feb 25 09:20 AFP

United States investment bank Morgan Stanley lowered its global growth forecasts on Monday, warning that geopolitical tensions had pushed the world back to the brink of recession.

"In response to mounting geopolitical tensions, we have cut our 2003-04 global economic forecast," the Wall Street titan's chief economist, Stephen Roach, said.

The global growth forecast for 2003 gross domestic product (GDP) fell to 2.5 per cent from 2.9 per cent. The forecast for 2004 dropped to 3.8 per cent from 4.0 per cent.

"The downward revision for 2003 has the effect of transforming an anemic recovery in the global economy into a world that is right back on the brink of its ... recession threshold -- 2.5 per cent," Roach said.

The new world growth forecast was at the upper bound of a 2.0-2.5 per cent possible outcome, Roach said.

Disrupted Iraqi output, low oil stocks and a production shortfall in Venezuela would send Brent crude oil spiralling to $US40 a barrel next month from about $US32.50 now, with only a modest retreat in April, he said.

Even after accounting for a decline in oil prices after a successful military action in Iraq, oil prices would rise 15.6 per cent over 2003, Roach said.

But there is more to this shock than oil, he added. advertisement advertisement

"Saddam Hussein's possible use of weapons of mass destruction cannot be ruled out, nor can collateral damage to Iraqi civilians, spillover effects to the Israeli-Palestinian conflict and heightened global terrorist activity," Roach added.

"Destabilising conditions in Korea add to the problem. The split between America and her allies only heightens the geopolitical instability factor. Nor is there any certainty about the stability of post-Saddam Iraq."

The world had built up a cumulative gap of 3.5 per centage points between long-term potential growth and actual growth over 2001-2003, the economist said.

The forecast for 2003 economic growth would not make much of a dent in that output gap, he said, raising the risk of deflation. "I think it makes sense to remain in the deflation camp even in the face of higher oil and other commodity prices," Roach said.

Among the major economies, Morgan Stanley forecast:

-- The US economy would grow 2.1 per cent this year, rising to 4.1 per cent next year.

-- Europe would grow 0.8 per cent this year and 2.3 per cent next year, with the 12-country euro zone expanding 0.6 per cent this year and 2.3 per cent next year.

-- Japan would grow 0.6 per cent this year and 0.5 per cent next year.

"As the world gears up for war, it is far more vulnerable than it was in 1990-91," Roach said.

"In large part, that is because today's US-centric global economy lacks the broadly-based support that a more balanced global economy had a dozen years ago."

Over the seven years from 1995 to 2002, the United States accounted for 64 per cent of the cumulative increase in world GDP, he said.

"Japan has been mired in a post-bubble malaise and the euro-zone growth dynamic has taken on a new sluggishness. Growth in Asia ex-Japan has remained brisk but well below the heady gains of the late 1980s. Meanwhile, Latin America has fallen victim to yet another in a long string of crises," Roach said.