By investadvocate

March 19, 2010- 15:56 GMT

As the global economy remains strong in year 2010, there are risks mounting for year 2011. This was contained in a Report on the Finfacts website, an Irish Business and Finance portal.

 

The Finfacts team reports that two (2) Economists from the United States (US) Investment Bank Morgan Stanley have affirmed that the global economic recovery remains strong in 2010 but the risks are mounting for 2011.

 

The economists, Joachim Fels, Manoj Pradhan and Spyros Andreopoulos, all based in London, say there is no need to worry about 2010 growth: They continue to forecast solid, above – -consensus global GDP growth of 4.4% this year – – despite growth downgrades in Europe, a weaker Q1 in the US (largely weather – -related) and the recent softening in the China Manufacturing PMI (reflecting Chinese New Year seasonality, in their view). 

 

They further affirmed that Monetary and fiscal policies remain very expansionary around the globe, asset markets – – though wobbly in January and February – – continue to be supportive, and the rebalancing towards domestic demand – -led growth in EM (emerging market) economies is in full swing. 

 

The economists say that the risks of a global double – – dip this year are low.  Rather, they think that economic growth could surprise on the upside over the next couple of quarters  – – the MS team in the US has a preliminary forecast for March payrolls for a whopping 300,000 gain!  The economists say they don’t think that bond markets are prepared for positive growth surprises and they continue to look for rising yields.

 

But downside risks for 2011: At the same time, the MS economists believe that downside risks for the global economy in 2011 are mounting, for three reasons.

 

First, many central banks in EM are about to start tightening monetary policy, and they expect the Fed to nudge official rates higher from Q3 2010 and thus earlier than markets currently expect.  Monetary policy works with a lag, so most of this will only impact 2011 growth. 

 

Second, the MS macro team is looking for significantly higher bond yields this year and for a sell-off in developed equity markets. If so, it would dampen growth prospects for next year further.

 

Third, the economists expect sovereign debt concerns to spread throughout the advanced economies as fiscal policy in most developed countries is on an unsustainable path. If (a big if, as discussed below) governments tighten fiscal policy significantly starting next year (this year, most countries are still easing fiscal policy), this would hurt growth. 

 

But if they don’t tighten, bond yields would likely rise even more and consumers would likely become even more cautious, again hurting growth. Taken together, the economists currently look for a moderate slowing of global GDP growth to 4% next year.  However, they say that the risks to next year’s growth outlook are skewed heavily to the downside.