Morgan Stanley forecasts global growth amid political uncertainty

Morgan Stanley has upgraded global growth forecasts but warned that late fiscal stimulus, faster Fed hikes and voter discontent pose a risk to its baseline figures.

The bank now expects global economic growth of 3.4% in 2017, compared to a previous estimate of 3.2% and 2.6% in 2016, driven by strength in developed markets including the UK, Japan, the euro-area and the US.

However, uncertainty surrounding the new administration under Donald Trump in the US, the triggering of Article 50 in the UK and elections across Europe all pose a threat to growth according to the bank.

Europe

MS expects European economic growth of 1.4% in 2017, dropping from 1.6% in 2016. Despite supportive financial conditions and further expected euro weakness, political risks dampened the bank’s growth outlook.

“With the Italian referendum, French presidential election and German general election we are essentially attempting a political triple jump in Europe and there are risks around each of these events,” said Morgan Stanley's global co-head of economics Elga Bartsch.

“We expect Matteo Renzi to lose the referendum on the constitution but we don't expect that to pave the way into an early election in the first half 2017.”

The bank also feel that the rise of populist parties could negatively affect global growth.

“Voter discontent and the broad backlash of globalisation is a real concern because there is quite a close connection between globalisation, productivity growth and investment spending, so if there is a backlash against globalisation it will not just hit international trade but it would also likely hit globally integrated supply chains and make it much more difficult for companies to make investment decisions,” said Bartsch.

In terms of monetary policy, the bank expects the European central bank (ECB) to extend its quantitative easing (QE) programme for another six months and thereafter gradually start to slow down the pace in the fourth quarter of 2017. Base rates are expected to remain at -0.40%.

United Kingdom

Growth during the second half beat the bank’s previous expectations for the aftermath of the Brexit vote. While it is more optimistic, Morgan Stanley expects growth to fall from 2% in 2016 to 1% in 2017.

The slowdown was attributed to a decline in investment, due to uncertainty about the UK’s relationship with the EU, and slower consumer spending growth, given higher unemployment and inflation. On the plus side the bank expects the UK to avoid recession and experience a positive contribution from net trade due to its weak sterling.

“Economic performance will be dominated by the exit negotiations. As well as driving the overall slowdown we think the crunch points in the negotiations are likely to...be potential triggers for policy stimulus,” said the report.

The bank expects the Bank of England to delay the next dose of stimulus until after the Article 50 process has started. The base rut will be cut from 0.25% to 0.10% in the second half of 2017 with quantitative easing postponed to 2018, according to the bank.

United States

Growth is expected to accelerate to 2% in 2017 from 1.6% in 2016. The bank feels that Trump’s presidency will provide a fiscal boost to the economy, with his proposed policies on tax cuts and infrastructure spending.

The bank feel his protectionist stance on global trade, with his recent denouncing of Transatlantic Trade and Investment Partnership (TTIP) and long standing opposition to the North American Free Trade Agreement (NAFTA), “goes little further than threats”.

The late cycle fiscal stimulus, faster fed rate hikes and the tightening of financial conditions could however undermine its forecasts.

The analysts predict a 25 basis point hike by Federal Reserve in December followed by two increases in 2017 and three more in 2018.