Tuesday, November 20, 2012

Morgan Stanley’s Doom Scenario: Major Recession in 2013

Numerous events over the next two or three years will continue to drive bad news. The resulting European fall out, the BRICK slow down and the disruption on brick and mortar business by internet based business’s. Aivars Lode

The global economy is likely to be stuck in the "twilight zone" of sluggish growth in 2013, Morgan Stanley has warned, but if policymakers fail to act, it could get a lot worse.
The bank's economics team forecasts a full-blown recession next year, under a pessimistic scenario, with global gross domestic product (GDP) likely to plunge 2 percent.
"More than ever, the economic outlook hinges upon the actions taken or not taken by governments and central banks," Morgan Stanley said in a report.
Under the bank's more gloomy scenario, the U.S. would go over the "fiscal cliff" leading to a contraction in U.S. GDP for the first three quarters of 2013. In Europe, the bank's pessimistic scenario assumes a failure of the European Central Bank (ECB) in cutting rates and a delay of its bond-buying program.
But the bank says investors should also be nimble, in case policy action is "convincing and decisive," leading to a big uptick in growth.
"Importantly, investors should keep an open mind and be prepared to switch between the scenarios as policy developments unfold."
The bank's most optimistic scenario forecasts GDP growth of 4 percent in 2012 compared to around 3.1 percent this year.
Morgan Stanley isn't alone in warning about a recession next year. Noted bear, Nouriel Roubini warned on Monday that certain key developments would exacerbate the downside risks to global growth in 2013.
"Until now, the recessionary fiscal drag has been concentrated in the euro zone periphery and the U.K.. But now it is permeating the euro zone's core," Roubini wrote. "And in the U.S., even if President Barack Obama and the Republicans in Congress agree on a budget plan that avoids the looming "fiscal cliff," spending cuts and tax increases will invariably lead to some drag on growth in 2013 – at least 1 percent of GDP."
Roubini said the rally in global markets that begun in July was now running out of steam as global growth slows and valuations look stretched.
"Price/earnings ratios are now high, while growth in earnings per share is slackening, and will be subject to further negative surprises as growth and inflation remain low. With uncertainty, volatility, and tail risks on the rise again, the correction could accelerate quickly."

Jeremy Grantham offers most-depressing forecast ever

Only a gloomy outlook if you don't have a map to navigate the road ahead. Aivars Lode

GMO strategist says 3% annual GDP growth now history; 'unpleasant facts'

November 20, 2012 3:01 pm ET
The U.S. will be stuck in a permanent slow-growth mode of about 1.4% per year, says Jeremy Grantham, GMO chief investment strategist.

“The U.S. GDP growth rate that we have become accustomed to for over a hundred years – in excess of 3% a year – is not just hiding behind temporary setbacks. It is gone forever,” Mr. Grantham wrote in a quarterly update today.
“When the debt is repaid and housing is normal and Europe has settled down, most business people seem to expect a recovery back to America's old 3.4% [real] growth trend, or at least something close. They should not hold their breath,” he wrote.
Driving the permanently lower growth rates are several long-term trends, Mr. Grantham said. At the top of the list: Lower population growth of less than 0.5%, which is down from more than 1.5% since the 1970s. The GMO strategist also pointed to low and declining growth in service productivity, as well as rising resource costs. In addition, he cited lackluster growth in man-hours worked annually, which he estimates will rise only 0.2% a year.
“Attitudes to change are sticky,” Mr. Grantham said. “We cling to the idea of the good old days with enthusiasm. When offered unpleasant ideas (or even unpleasant facts) we jump around looking for more palatable