Global growth forecast slashed

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WASHINGTON - US investment bank Morgan Stanley has lowered its global growth forecasts, 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% from 2.9%. The forecast for 2004 dropped  to 3.8% from 4.0%.

"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%," Roach said.

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

Disrupted Iraqi output, low oil stocks and a production shortfall in Venezuela would send Brent crude oil spiralling to 40 dollars a barrel next month from about 32.50 dollars 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 percent over 2003, Roach said.

"There is more to this shock than oil," he said.

"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.

"Destabilizing 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 percentage 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% this year, rising to 4.1% next year.  - Europe would grow 0.8% this year and 2.3% next year, with the 12-country euro zone expanding 0.6% this year  and 2.3% next year.

• Japan would grow 0.6% this year and 0.5% 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% 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.

Wells Fargo and Co. economist Scott Anderson said another economic shock such as higher oil prices or declining consumer confidence might hold back a US recovery.

"We suspect the US economy will continue to muddle through, like  last year, for much of 2003," he said in a report.

"Looking past a war in Iraq, it is clear that even a quick and decisive victory will not solve some of our major economic problems. Global growth is stalling, particularly in Europe and Japan."   Sapa-AFP