The Global Economy Continues To Sink Deeper Into The Twilight Zone

A few weeks ago, Morgan Stanley's head global economics Joachim Fels sent a note to clients entitled Into the Twilight Zone. In the note, the group downgraded its global growth forecasts, reflecting increasing pessimism across Wall Street on the future of the world economy.

Fels just put out an update today, writing that "recent disappointing data suggest that the global economy is sinking ever deeper into the twilight zone that divides sustainable recovery from renewed recession."

Here's Fels in his most recent note, looking at the new data that's been revealed since Morgan Stanley downgraded its growth forecasts:

Disappointing data: Since we lowered our sights on global growth three weeks ago (see The Global Macro Analyst: Into the Twilight Zone, August 15, 2012), economic conditions have continued to deteriorate across emerging and advanced economies alike:

In China, the official manufacturing PMI fell into contraction territory for the first time in nine months in August, with widespread weakness across the relevant sub-components.

In India, our colleague Chetan Ahya has cut his 2012-13 GDP forecast for the third time this year and highlights the rising risk of a “deeper macro stress scenario” in the event of continued policy inaction (see page 8 or India Economics: Risk of a Deeper Growth Shock Rising, September 3, 2012).

In the US, the only slight decline in the manufacturing ISM composite index masked a greater deterioration in the relevant underlying details, including worsening indications for new orders, production and employment. The composite index was helped by a jump in the inventory component, but this is hardly a positive sign at a time of falling new orders and points to further production cuts ahead.

In Sweden, the manufacturing PMI dropped by an outsized 5.5 points to 45.1. Sweden’s manufacturing firms are exposed heavily to the European and global economy, so we take this as an(other) indication that the global trade cycle has deteriorated further.



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