Ahead of a decision today on US interest rates, American financial giant Morgan Stanley has predicted the economy is heading for recession.
In a report released overnight, entitled ‘Recession Coming’, the firm's managing directors Richard Berner and David Greenlaw show little optimism for US growth.
The report states a “mild recession is now likely”, due to tightening of financial conditions, domestic capital spending weakness and a slowing of global growth.
It predicts US domestic demand to contract by an annualised average 1% in each of the next three quarters, no growth in overall GDP for the year ending Q3 2008 and corporate earnings to contract by 5-10% during the same period.
Morgan Stanley expects the Federal Reserve to cut rates by 0.25% today, and could even drop rates by a further 0.75% in the next seven to nine months.
“Compared even with a few weeks ago, financial conditions have tightened significantly further as the price of credit has risen and lenders have made credit less available,” the report reads.
“Money-market rates have risen significantly, and yield spreads over those money-market rates on loans have stayed high or widened.”
Weakness in business capital spending is also a considerable factor, Morgan Stanley says.
“A slowing in the growth of economic activity will depress the level of investment,” it says.
“Managers will tend to extrapolate a slowdown in business activity into dimmer expectations of future growth, lower perceived returns from investing, and a reduced need to invest.”
Morgan Stanley says the Fed has more to do.
“Insufficient Fed action could again threaten a deeper economic slowdown,” it noted. “A contrasting risk is that we’re swayed by Wall Street pessimism and that things may be better on Main Street. In our view, downside risks still dominate.”
To comment on this story, contact:
0207 034 2681
First mentioned in Cridland Report
Second acquisition of 2019
Guy Opperman has rejected calls to speed up changes to auto-enrolment (AE) despite increasing pressure to boost contribution rates and overall savings pots.
Four key areas to focus on
And 94% for critical illness