Morgan Looks Way Out

Dick Berner at Morgan Stanley’s Global Economic Forum thinks the U.S. will avoid depression and that the recession will be about as bad as the one in 1991, but that this will be the first time since World War II that the world’s advanced economies contract together:

“We now think that the depth of the global downturn will be similar to the 1991 recession, when global GDP growth fell to 1.5%. What makes this downturn different, however, is that it is likely to bring the first synchronized full-year contraction of output in all the major advanced economies since World War II.”

The financial crisis and meltdowns in emerging economies will make the fourth quarter in advanced economies more pronounced than initially thought. “Not only does that weaken the entry point into 2009,” he wrote, “but it also hints that the effects of these shocks will depress economic activity at least into mid-year.”

He expects fiscal stimulus to gradually take hold in the first half of next year, and then spark a tentative recovery from there. “Thus, our best guess remains that the global economy troughs out around the middle of the year and shows some tentative signs of recovery during 2H09.”

The use of “tentative” hints that a sustained recovery could be as long as a year away. Even then, he suggest you shouldn’t get your hopes up because he and his team “expect the coming recovery in late 2009 and 2010 to be anemic rather than dynamic.”

The reasons:

  • Lower home and equity prices have reduced private sector wealth and the collateral against which households can borrow.

  • The prospect of much slower growth — or even further declines — in household wealth will prompt consumers to save more out of current income. In addition, sharply rising government deficits and debt could make consumers want to save more, as they have less confidence that governments will keep past promises to provide healthcare and retirement income, or think they need to prepare for higher taxes. While higher private savings are good for long-term growth and will reduce the odds of a fiscal crisis in coming years, they will dampen aggregate demand in the short and medium term.

  • Lower equity valuations also make it relatively less attractive for companies to invest in new capital.

  • Banks’ and other leveraged lenders’ willingness and ability to lend freely and cheaply to the private sector is likely to be much reduced in the foreseeable future. Financial regulatory reforms likely will impose higher capital requirements and thus reduce leverage and risk-taking. Access to fresh capital for the private sector is therefore likely to be restricted and more expensive for some time to come.

Lest you get too exuberant with that fine wind in your sails, Mr. Berner passed along a couple caveats to qualify his optimism: “The risks to our 2009/10 growth forecasts are still skewed to the downside as further financial shocks may lurk and policy may not find traction as early or by as much as we think.”

Most people in the U.S. feel the same way. A survey conducted last month by The Nielsen Company found that 86% of consumers believe the country is in a recession, and 54% think it will last more than a year. Only 18% think it will be over within a year. Among people over 65, a demographic that’s been around a while and presumably knows more about the ways of the world, only 7% think the recession will be over within a year.

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