US dreads the R word, but numbers paint a grim picture

The calm of the past few days was shattered as the turmoil of last week returned to global stock markets on persistent worries of a sputtering US economy and the spreading debt contagion in Europe. Those fears were amplified after Morgan Stanley issued a research note warning that the world economy was facing a ‘double-dip’ slowdown, and cut growth forecasts for every major economy, including China and India.

[caption id=“attachment_64284” align=“alignleft” width=“380” caption=“Morgan Stanley cut the global GDP growth forecast for 2011 to 3.9 percent from 4.2 percent, and its 2012 estimate to 3.8 percent from 4.5 percent. Reuters”]  [/caption]

In a research note titled ‘Dangerously Close to Recession’, Morgan Stanley cut the global GDP growth forecast for 2011 to 3.9 percent from 4.2 percent, and its 2012 estimate to 3.8 percent from 4.5 percent.

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For the euro zone, the growth estimate for 2011 was lowered to 1.7 percent from 2 percent, and its 2012 estimate to 0.5 percent from 1.2 percent earlier. “Our revised forecasts show the US and the euro area hovering dangerously close to a recession – defined as two consecutive quarters of contraction – over the next 6-12 months,” said Joachim Fels, who co-heads Morgan Stanley’s global economics team, in a research note. “A negative feedback loop between weak growth and soggy asset markets now appears to be in the making in Europe and the US.”

The brokerage also slashed its forecast for India’s 2012 GDP growth to 7.4 percent from 7.8 percent.Growth in emerging market economies will also slow to 6.4 percent this year from 7.8 percent in 2010, Fels estimated.

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This means that emerging market economies – which now account for half of global GDP – will generate 80 percent of the global GDP growth that Morgan Stanley is forecasting for 2011 and 2012, Fels added.

Adding to the pressure was Goldman Sachs, which also lowered its global gross domestic product forecast. The brokerage said it now expects 4 percent growth in 2011 and 4.4 percent in 2012, compared with earlier estimates of 4.1 percent and 4.6 percent, respectively.

The brokerage house cut its 2011 GDP growth forecast for the US to 1.7 percent from 1.8 percent and for 2012 to 2.1 percent from 3 percent. For Europe, Goldman cut its 2011 GDP estimate to 1.9 percent from 2.1 percent and its 2012 estimate to 1.4 percent from 1.7 percent.

In addition, The New York Times newspaper reported that an unidentified bank hadresorted to borrowingfrom the European Central Bank, suggesting emerging strains in the banking system. European bank shares have been facing intense selling pressure from investors because so many of the assets of the region’s banks are invested in the countries currently plagued by debt repayment problems.

A stream of bad economic data in recent days from both the US and Europe is only confirming fears that the world’s two-biggest economic regions are heading for a slowdown.

So, how worrying are the signs of slowdown in the US and European economies? Here’s a quick look at the economic state of both regions.

US:

Manufacturing seems to be contracting. On Thursday, a key guide to manufacturing activity in the Mid Atlantic states plunged to its lowest level since March 2009. The index nosedived to -30.7 points in August from 8.2 points in July, its lowest level since March 2009. Any figure below zero indicates contraction in the manufacturing sector, which is extremely worrying because manufacturing has been an important source of growth for the economy since 2008. One London-based economist said the index was now “at levels that point towards recession territory”.

In the housing market, home sales fell in July for the third time in four months, the National Association of Realtors said. Sales dropped 3.5 percent to a seasonally adjusted rate of 4.67 million homes - far below the six million homes that experts believe are needed to maintain a healthy housing market. The fall comes despite mortgage rates hitting their lowest level in 50 years.

The labour market is struggling as well. More Americans than forecast filed applications for unemployment benefitslast week. Jobless claims climbed by 9,000 to 408,000 in the week ended August 13, the highest in a month, Labour Department figures. The unemployment rate is still a high 9.1 percent, and job growth has been far below what is needed to reduce the rate, according to economists.

Retail sales, however, provided some relief. US retail sales rose 0.5 percent in July, its highest level in four months. Consumers spent more on furniture, cars and petrol in July, in part reflecting the higher cost of fuel. However, consumers have been more careful about spending in recent months, partly due to high unemployment and rising energy and food prices. Consumer spending accounts for two-thirds of the economy.

Yet consumer confidence plunged to its lowest level in 31 years. The Thomson Reuters/University of Michigan survey’s preliminary finding for the start of August showed consumer sentiment at 54.9, the lowest level since May 1980.

Meanwhile, inflation roared back in July at the fastest pace since March. A sharp jump in gasoline prices and continued increases in food prices drove last month’s inflation surge.

After all the volatility of the past month, the Dow Jones industrial average has lost more than 14 percent since July 21. That includes Thursday’s drop of more than 419 points.

Eurozone:

Overall economic activity is slowing. Gross domestic product in the 17-nation euro area rose 0.2 percent in the second quarter, after a 0.8 percent rise in the first quarter. That’s the worst performance since the euro region emerged from a recession in late 2009. Germany’s economy, the eurozone’s biggest, reported growth of just 0.1 percent in the June-ending quarter. The second-biggest economy, France, failed to grow at all in the second quarter, after a healthy 0.9 percent spurt in Q1.

Inflation in theeurozone, however,eased in July from preceding months’ peaks due to statistical changes. Consumer prices overall in the 17 countries using the euro fell 0.6 percent month-on-month in July, but rose 2.5 percent year-on-year. In June, annual inflation was 2.7 percent. Declining prices of clothing, traditionally sold at a discount in many countries in July, partly offset a continued impact of energy and fuel costs compared with 2010 levels.

Meanwhile, retail sales rose 0.9 percent in June month-on-month, partly offsetting May’s 1.3 percent slide. However, most economists believe this could be a temporary pop as high inflation, relatively muted wage growth and tighter fiscal policy are likely to keep spending muted.

Of course, the biggest worry about the eurozone revolves around their high debt levels. High debt levels are pressuring government to cut spending to bring their budgets into better balance. However, the cuts being considered come at a time when economic growth has not picked up pace, leading to growing fears over the ability of countries to repay their debts.

After the US lost its sterling AAA credit rating, investor attention has shifted to France, primarily because of the high levels of investment of its banks in the government bonds of the region’s troubled economies such as Greece. With France, the fear is that the debt contagion may start affecting even the large economies of Europe.