Morgan Stanley warns on looming recession
US and EU 'policy errors' are eroding consumer confidence
A gloomy report on the global economy from US bank Morgan Stanley sent markets into a tailspin as the lender said a worldwide recession was "dangerously close''.
The euro area will grow by only 1.7pc this year, down from 2pc; while US growth will slide to 1.8pc, compared to an earlier forecast of 2.6pc.
The bank said both the US and Europe were both committing "policy errors" that were eroding consumer confidence and weighing down financial markets.
"Our revised forecasts show the US and the euro area hovering dangerously close to a recession."
This would happen on the back of just two quarters of negative growth over the next six to 12 months.
"It won't take much to tip the balance," said the bank. However, it said a double-dip recession was still not its base case.
But a recession could be avoided if companies maintain healthy balance sheets and, secondly, headline inflation remains under control.
The bank also said central banks should keep rates low and provide other forms of liquidity.
However, the global economy is unlikely to plunge into the kind of problems witnessed in 2008.
"Initial conditions are better now; household, corporate and bank balance sheets were much weaker; monetary policy was tight, and the Lehman collapse meant that the financial system totally seized up,'' it said.
"Any plausible recession scenario in 2011-12 should be much shallower than in 2008-09,'' the lender said.
In terms of global growth, the forecast was revised downward from 4.2pc to 3.9pc. Growth in developed markets will only average about 1.5pc this year and next, far lower than averages over 20 years.
In a section on Europe, the lender said a critical problem was that banks could not access term funding at reasonable rates. "As a result, commercial banks continue to tighten their credit conditions, albeit marginally, to both their corporate and their retail clients."
The failure of political leadership in relation to the eurozone debt crisis was having a direct economic impact, said the bank.
"Genuine uncertainty about the eventual policy response from governments will likely weigh on the propensity of companies and consumers to go ahead with larger investment projects."