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News : EU Economy Last Updated: Jun 16, 2010 - 12:12:25 PM


Global Economy: Double-dip discounted despite drumbeat of doomsayers
By Finfacts Team
Jun 15, 2010 - 4:35:20 AM

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Shanghai's World Financial Center - - China's tallest building

Global Economy: Economists at US investment bank Morgan Stanley have discounted a double-dip recession despite the drumbeat of doomsayers.

A 5% handle for global output growth? Joachim Fels, Manoj Pradhan and Spyros Andreopoulos, all based in London, say that notwithstanding the sovereign debt crisis that is rattling Europe and unnerving global financial markets, global economic growth has continued to surprise on the upside over the past few months. In fact, the cyclical momentum over the past couple of quarters has been even stronger than MS had anticipated in its above-consensus forecast earlier this year, with global GDP growing at a very solid average annualised pace of more than 5% during 4Q09 and 1Q10, and probably only a touch less (4.6% saar - - seasonally adjusted annual rate ) in the current quarter.

As a consequence, the MS forecast for full-year 2010 global GDP growth has moved up from 4.4% last quarter to 4.8% now, and the economists say they wouldn't be surprised if it turned out to be 5% or higher eventually. So, defying the scepticism that was so popular and widespread this time last year, the global economy has staged an impressive rebound from the deepest post-war recession, thanks mostly to massive and unconventional monetary and fiscal stimulus.

Made in EM: The economists say it's true, the global rebound has been largely driven by Emerging Market (EM) economies, while Developed Market (DM) economies have lagged. On MS calculations, although they account for only around 50% of global GDP (using PPP weights), EM countries accounted for around 75% of global GDP growth over the past four quarters, supporting the MS ‘tale of two worlds' theme from the start of the year. However, even DM economies have surprised on the upside so far this year, and the bank's economic teams have accordingly lifted their full-year 2010 GDP forecasts for, among others, the US (up two-tenths of a point to 3.4%), Japan (up 1.6 points to 3.4%) and even for the crisis-rattled Eurozone (up three-tenths to 1.2%) since the March global forecast.

Europe's sovereign debt crisis is not enough in and of itself to push the world into a double-dip recession, believes Stephen Roach, chairman of Morgan Stanley Asia. He makes his case to CNBC's Bernard Lo & Karen Tso:

Fears of a double-dip...  The economist say, yet, notwithstanding (or because of) the strong global rebound over the past year, the doomsayers are beating the drums again, warning of a double-dip recession later this year or in 2011. The rebound is water under the bridge and the sovereign debt crisis, the coming fiscal tightening, the banking sector problems and tougher regulation and government intervention could abort the recovery, or so the story goes. 

...are overdone, they think: The economists agree that past (cyclical) performance is not a good guide to future performance and, in fact, they say they do believe that the cyclical momentum probably peaked in Q1 2010. This view is consistent with the manufacturing PMIs (Purchasing Managers' Index surveys) topping out in major economies such as the US, China and the Eurozone recently, and it is fully reflected in MS forecasts showing a moderation of sequential GDP growth over the next several quarters and during 2011. However, they maiontain that the widespread fears of a very sharp slowing of growth or even a double-dip recession are overdone, for three reasons.

Exporters in the Eurozone will start to benefit from the weak euro, David Bloom, global head of foreign exchange, told CNBC. "What's amazing is that everybody wants a weaker currency but when Europe gets it, it's a crisis," he added.

Trend versus cycle: For starters, the economists agree that the European sovereign debt crisis (which is by far not over yet), the ongoing banking sector woes, higher taxes and increasing government intervention are important negatives for economic growth. However, they are more likely to depress developed economies' growth potential and thus the trend rate of growth over the medium-to-long term, rather than causing a sharp cyclical downturn from one quarter to the next. Ever since the start of the credit crisis, they say they have argued that potential growth would be lower in this cycle due to rising structural impediments. However, just as these headwinds did not prevent a strong cyclical recovery last year, the economists don't expect them to be strong enough to cause a double-dip recession anytime soon.

Austerity ain't aggressive at all: Second, apart from the countries in the Eurozone periphery and potentially the UK, where the new government will only announce details on June 22, fiscal policy looks unlikely to tighten very aggressively over the next 12-18 months. Fiscal deficits in large economies such as the US, Japan, Germany, France and Italy are projected to decline by less than one percent of GDP.  Moreover, fiscal tightening in countries where unsustainably large public sector deficits weigh down on private sector confidence and spending may actually crowd in private sector spending.

Don't forget easy monetary policies: Third, but not least, monetary policy has remained super-expansionary across the globe, thus supporting cyclical growth. Moreover, the worries related to the sovereign debt crisis and its potential fall-out will keep the Fed and the ECB on hold for longer than previously thought. This, in turn, has delayed or even aborted further monetary tightening in many EM countries which aim to prevent (excessive) appreciation of their currencies against the dollar or the euro, and thus keeps propelling domestic demand in EM, which in turn supports DM countries' exports. 

Bottom line: The economists say there are plenty of things to worry about: a sovereign crisis that in their view will eat its way through the European periphery into the core and eventually move across the Atlantic; lower potential growth due to tougher regulation, higher taxes and weak banking systems; and potential global inflation surprises in EM countries due to excessively loose global monetary policies. However, the double-dip recession and the resulting deflationary pressures that many worry about right now are merely tail risks, in their view.

The US has a decent chance of a double-dip recession as unemployment remains high and consumers are hurting, says Len Blum, managing director of Westwood Capital. He talks to Kirby Daley of Newedge Group and CNBC's Karen Tso and Martin Soong:

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