Morgan Stanley Calls For US Recession In 1st Half Of '01
By STEVEN VAMES and BRIAN BLACKSTONE
Of DOW JONES NEWSWIRES
NEW YORK -- The record-long U.S. expansion that has lasted almost a decade is over, according to Morgan Stanley Dean Witter (MWD) chief economist Stephen Roach.
Roach has slashed his projections for both U.S. and global growth for 2001, and thinks the U.S. will post negative growth in the current quarter and the second, satisfying the technical definition of a recession set by the National Bureau of Economic Research. The last U.S. recession ended in early 1991.
Morgan Stanley economists estimate that gross domestic product will contract at a 1.25% annualized rate during the first two quarters. They're looking for a broad-based contraction in final demand early this year, with inventories correcting as a result.
The U.S. grew in excess of 4% from 1997 through 1999, and likely exceeded 4% in 2000 as well.
Roach also expects this recession will be short-lived, with the U.S. closing the year growing at a 4% clip.
For all of 2001, the firm expects GDP growth of 1.1%, down from their prior forecast of 2.5%.
The firm's chief U.S. economist, Richard Berner, also sees a sharp downturn in the pace in high-tech investment. After growing at a 28% pace recently, information technology demand will fall to zero by the third quarter this year.
Roach noted, however, that the recession will not have some of the gloomy implications that past recessions have had, given the comparatively healthy state of the economy compared to prior recessions.
Given short and mild nature of the recession he is predicting, Roach said that credit markets, especially for corporate debt, are likely to continue functioning.
"Credit markets have already taken on board the risks of a very deep recession, and they haven't entirely seized. If we only have a mild recession, that leaves the credit markets a lot of room to improve."
He also said that consumers will continue to benefit from such factors like the strong jobs market and low home financing rates. The slowing will be felt by consumers, but it will not be as painful as other recessions in history, he noted.
"Because we're coming out of such a strong growth period, it will feel a lot worse than it is," Roach said.
"Imagine driving somewhere and breaking every speed limit, then you see the red lights in your rearview mirror and you have to slow down quickly. The deceleration is going to make you feel like you're flying through the windshield," he added.
Morgan Stanley economists project that the U.S. recession will drag the world economy with it, and upped their probability of a global recession to 45%.
They still think the global economy will expand in 2001, but cut their growth estimate to 2.9% from 3.5%.
"Initially, the reactions should remain concentrated in the developing world, where the growth dynamic has been highly leveraged to the United States in recent years," the firm said in a release Monday.
They're cutting their growth forecast for non-Japan Asia to 5.8% from 6%, and Latin America is now seen growing 3.6%, down from the 4% previously projected.
The industrialized word will feel the effects as well.
Since Canada is such a large trading partner of the U.S., it should feel the effects of a U.S. recession first, Morgan Stanley economists reason. They've lowered their 2001 Canadian growth forecast to 2.5% from 3%. Morgan Stanley has also cut its Japan 2001 growth forecast to 0.3% from 0.6%.
"Europe is expected to escape with the least damage," they wrote, with that region's growth forecast cut just 0.3 percentage point to 2.2%.
The firm notes that exports to the U.S. only account for 2% of that region's GDP. At the same time, Europe should still benefit from fiscal stimulus and a self-sustaining rise in domestic demand.
-By Steven Vames and Brian Blackstone, Dow Jones Newswires; 201-938-2206; steven.vames @dowjones.com and brian.blackstone@dowjones.com |
