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Morgan Stanley Lowers Global Growth Forecast

Morgan Stanley cut its forecast for global growth this year, citing an “insufficient” policy response to Europe’s sovereign debt crisis, weakened confidence and the prospect of fiscal tightening. The bank estimates expansion of 3.9 percent, down from a previous forecast of 4.2 percent, according to an e-mailed report dated today. A prediction of 3.8 percent for next year is down from 4.5 percent previously.

The threat to the global economy from the debt burdens of developed nations from the U.S. to Europe has roiled world markets this month and wiped trillions of dollars off the value of equities. At the same time, slowing expansions in countries including Germany, the key driver of European growth, are hurting confidence.

The U.S. and Europe are “dangerously close to recession,” Morgan Stanley analysts including Chetan Ahya said in the note. “Recent policy errors, especially Europe’s slow and insufficient response to the sovereign crisis and the drama around lifting the U.S. debt ceiling, have weighed down on financial markets and eroded business and consumer confidence.”

The MSCI Asia Pacific Index lost 1.2 percent as of 1:16 p.m. in Tokyo, halting a three-day, 2.8 percent gain. Standard & Poor’s 500 Index futures fell 0.8 percent.

Hong Kong will have a “shallow recession” with the economy contracting in the third quarter from the previous three months, Morgan Stanley said in another e-mailed note today.

China’s Growth

The bank cut an estimate for China’s growth next year to 8.7 percent from 9 percent. Deutsche Bank trimmed a prediction for this year to 8.9 percent from 9.1 percent, in a report yesterday. “Western demand will shrink as they need to tighten their fiscal policies,” Chinese Commerce Minister Chen Deming said in Hong Kong yesterday.

German Chancellor Angela Merkel and French President Nicolas Sarkozy this week ruled out steps such as the issuance of euro bonds or expanding a bailout fund to counter the European debt crisis. Pacific Investment Management Co., the world’s biggest bond fund manager, said that European politicians should let Greece, Ireland and Portugal default while taking steps to ensure Italy and Spain won’t.

Morgan Stanley cut its estimate for growth in the Group of 10 nations to 1.5 percent this year and next, down from previous forecasts of 1.9 percent in 2011 and 2.4 percent in 2012, today’s report showed.

“A negative feedback loop between weak growth and soggy asset markets now appears to be in the making in Europe and the U.S.,” the analysts said. “This should be aggravated by the prospect of fiscal tightening in the U.S. and Europe.”

France’s growth stalled in the second quarter, while the German economy gained 0.1 percent from the first quarter. In the U.S., the Federal Reserve has pledged to keep interest rates at a record low through mid-2013, indicating that the world’s biggest economy will continue to need support.

Source: Paul Panckhurst (Bloomberg)