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To: ms.smartest.person who wrote (4450)	1/10/2001 2:44:13 AM
From: ms.smartest.person	Read Replies (1) \| Respond to of 4541

Morgan Stanley cries recession JON OGDEN -------------------------------------------------------------------------------- Morgan Stanley Dean Witter has become the first big United States investment bank to take the gloves off and forecast the world's biggest economy was heading into recession. The "bold" call by Morgan Stanley's global economist Stephen Roach prompted his regional counterpart Andy Xie to cut his forecast for growth in Asia excluding Japan from 5.9 per cent to 5.6 per cent. A deluge of weak economic and corporate data in the past two months has caused investment banks and fund management houses to chip away at their optimistic forecasts that the US economy could grow more than 3 per cent this year, meeting the definition of a soft landing. Morgan Stanley itself, in its Macroscope outlook report published early last month, thought the US would grow at 3 per cent this year. That figure was lowered to 2.5 per cent towards the end of last month, shifting the house into the hard-landing camp. In the latest downgrading, Morgan Stanley said the US economy would grow only 1.1 per cent this year and would contract an annualised 1.25 per cent in the first two quarters, meeting the technical definition of a recession. "There is no question in my mind that Smokestack America is now in recession," Mr Roach said in a note to clients. Even the new gloomy number for the US, prompted by signs of slowing consumer and capital spending, might prove too optimistic, he said. "Our downwardly revised forecast represents the mildest recession in the modern-day history of the US economy," he said. "The risk is it will prove to be longer and deeper than expected." With the US economic engine hitting stall speed or worse, "I would attach a 45 per cent probability to a full-blown global recession", he said. Mr Roach also slashed his projection for world economic growth to 2.9 per cent from 3.5 per cent and called it "the largest single cut we have ever made" to the figure. World growth last year was expected to come in at a heady pace of 5 per cent. "This paints a picture of a US$32 trillion global economy that has essentially turned on a dime," Mr Roach said. Like most other investment banks, Morgan Stanley is projecting that interest rates will stoke a second-half rebound in the US, helping the global economy to swiftly get back on track. However, there were many hazards standing in the way of the optimists' growth scenario, Mr Roach said. Export projections for the US might have to be cut as the rest of the world caught an economic chill from its leader. California could provide a shock with its unfolding energy crisis and "dotcom implosion". Credit markets might seize up on growing concerns about the ability of debtors to repay. Pensions were increasingly reliant on returns from securities and this could mean bear markets hit economies more than bull markets helped them. Then there were the "vast unknowns" as the technology sector went into a down cycle, Mr Roach said. "Modelling a mild recession in this climate may turn out to be a heroic leap of faith," he said. Regional economies could cushion some of the impact from the global downturn by allowing their currencies to weaken, boosting export competitiveness, Mr Xie said. Central banks merely had to continue their practice of recent months of buying US dollars. Weakness in currencies would stimulate money supply, and therefore domestic growth. The region would be more than equal to rival developing economies in terms of keeping exports cheap in a tough global environment. "Asia is the toughest guy on the block. They're going to cut everybody else down to size. Frankly, Latin America will be wasted," Mr Xie said. Mr Roach ended his note by telling buyers to beware. "As we see it, the main task ahead will be for investors to come to grips with the rapidly emerging downside of a world now on the brink of recession," he said. markets.scmp.com