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European downturn worse than expected

Written by Gary Howes
Monday, 06 October 2008
Morgan Stanley says a more serious downturn in Europe has increased over the last few weeks. Morgan Stanley (NYSE:MS) has today downgraded their forecast for growth in the euro area. Related Articles This is NOT the Great Depression US and Europe to suffer in 2009 Credit Suisse: Europe economic conditions improve China: Q3 slowdown sharper than expected Banks release Swiss Francs Morgan Stanley had previously expected the euro area economy to broadly stagnate during the remainder of this year and to recover robustly over the course of next year. Now expectations are for an outright contraction in economic activity lasting at least until early next year with economic recovery coming later next year - and being more muted. Growth expectations have been cut by a full percentage point over the course of next year. Growth for 2008 stands at 1%. Previously it was set at 1.3%. Next years growth is expected to come in at 0.2%, down from 1%, this is below the 1.3% which Morgan Stanley says is consensus. The 2009 estimate marks the lowest growth rate since 1993, a year in which euro area GDP fell 0.7%. Together with a significant downshift in the companies inflation forecast profile, this opens the door for significant monetary policy easing by the ECB in the coming 12 months. There are three reasons for the downgrading: First, incoming economic activity and sentiment indicators have been disappointing over the last 6-8 weeks, suggesting that the weakness in economic activity has continued in 3Q and is starting to spill into 4Q Second, renewed financial market turmoil increases the risks of a marked tightening in financing conditions Third, significant downside risks have emerged in many of key trading partners of the euro area However Morgan Stanley does say that the recession is not likely to be as bad as that experienced in the early 1990's as contrary to other major central banks, the ECB did not cause the slowdown by embarking on an outright restrictive monetary policy stance. The last refi rate hike to 4.25% in July is probably the first incident of the bank tapping its feet on the brakes. Another reason is that, as a whole, the euro area does not suffer from major imbalances in private sector balance sheets. Hence, once the write-downs of financial assets have been done and dusted, there is still a fundamentally healthy lending business to go back to.