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“More
than ever, the economic outlook hinges upon the actions taken or not
taken by governments and central banks,” Morgan Stanley said in a
report.
Under the
bank’s more gloomy scenario, the U.S. would go over the “fiscal cliff”
leading to a contraction in U.S. GDP for the first three quarters of
2013. In Europe, the bank’s pessimistic scenario assumes a failure of
the European Central Bank (ECB) in cutting rates and a delay of its
bond-buying program.
(Read More: Whom to Blame for Global Growth Woes)
But
the bank says investors should also be nimble, in case policy action is
“convincing and decisive,” leading to a big uptick in growth.
“Importantly, investors should keep an open mind and be prepared to switch between the scenarios as policy developments unfold.”
The bank’s most optimistic scenario forecasts GDP growth of 4 percent in 2012 compared to around 3.1 percent this year.
(Read More: Why Risk Is Back On For Markets)
Morgan
Stanley isn’t alone in warning about a recession next year. Noted bear,
Nouriel Roubini warned on Monday that certain key developments would
exacerbate the downside risks to global growth in 2013.
“Until
now, the recessionary fiscal drag has been concentrated in the euro
zone periphery and the U.K.. But now it is permeating the euro zone’s
core,” Roubini wrote. “And in the U.S., even if President Barack Obama
and the Republicans in Congress agree on a budget plan that avoids the
looming “fiscal cliff,” spending cuts and tax increases will invariably
lead to some drag on growth in 2013 – at least 1 percent of GDP.”
(Read More: Faber Prepare for Massive Market Meltdown)
Roubini
said the rally in global markets that begun in July was now running out
of steam as global growth slows and valuations look stretched.
“Price/earnings
ratios are now high, while growth in earnings per share is slackening,
and will be subject to further negative surprises as growth and
inflation remain low. With uncertainty, volatility, and tail risks on
the rise again, the correction could accelerate quickly.”
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