Economy to shrink 2% next year: Morgan Stanley

Source : Straits Times - 12 Nov 2008

Big drop from its earlier tip of 0.2% growth; global forecast also cut
SINGAPORE’S economy may shrink 2 per cent next year as it suffers from a worse-than-expected global recession, Morgan Stanley predicted yesterday.
This estimate is a drastic cut from the investment bank’s previous tip of a 0.2 per cent expansion, and marks the most bearish view so far for growth next year.
Full-year growth has not dipped below zero since the dot.com bust in 2001, when the economy shrank 2.4 per cent.
Morgan Stanley also slashed its projection for global growth - from 2.5 per cent to 1.7 per cent - and lowered growth forecasts for several countries.
‘The vicious loop of rising credit defaults, shrinking risk capital pool, slowing growth and rising unemployment is unveiling the possibility of deeper-than-expected recession,’ it said.
On the bright side, the consensus at the three-day Morgan Stanley Asia Pacific Summit, which opened at the Mandarin Oriental yesterday, was that this slowdown is not going to turn into the second Great Depression.
‘This time around, policymakers reacted at a much earlier stage,’ said Morgan Stanley’s co-head of global economics, Mr Joachim Fels, a member of a panel examining the global outlook.
‘We’ve already seen very aggressive responses from policymakers…no bank is allowed to fail, unlike in the 1930s.’
Mr Fels said he expects the slowdown in the United States and Europe to bottom out somewhere in the middle of next year, thanks to the coordinated monetary policy action and a massive fiscal package expected when Mr Barack Obama assumes office as US president.
‘Mr Obama’s fiscal stimulus will probably kick in in the first half of next year.’
The effects of policy actions so far have been blocked somewhat by the paralysed financial system, but now that governments are offering more liquidity to the banking system, they should soon filter through to the real economy, he added.
But the recovery expected in 2010 is likely to be a ’sub-par’ and ‘tepid’ one - payback for the large fiscal injections now.
‘Consumers will offset increased public debt by saving more,’ said Mr Fels. ‘There will be much slower economic growth than we have been used to.’
The crisis will also take its toll on Asia as the cost of capital spikes and export demand plunges with the world’s major developed economies in a recession.
Likely to be worst hit are South Korea, Australia, Indonesia and India, said Mr Chetan Ahya, a managing director and India and Asean economist at Morgan Stanley. These four economies are running current account deficits and have seen loans grow strongly relative to their economies, making the credit crunch more painful for them, he explained.
In a separate event at the summit, Harvard University professor Niall Ferguson also said this crisis is ‘not the Great Depression, just a big recession’.
‘I don’t think we will see unemployment in the US reach 25 per cent and output collapse 30 per cent,’ he said. ‘We have learnt that we cannot let generalised banking failures happen.’
Prof Ferguson also argued that the US would not lose its place as the world’s economic superpower despite this crisis being ‘made in America’, a reference to sub-prime mortgages that went bad.
The US has the fiscal power to ‘throw US$2 trillion (S$3 trillion) at the problem’ while Europe is suffering more. Also, the US has a symbiotic relationship with China - one the spender, the other the lender - that will weather the crisis.