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Here's why Morgan Stanley thinks the world's biggest economies may be powerless to stop the next recession

Daniel Strauss , Business Insider US
 Aug 28, 2019, 12:17 PM
Germany
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  • Central banks in some of the world's largest economies are gearing up to deploy new monetary stimulus to stave off a brewing global recession.
  • But that stimulus might not be enough to prevent a downturn, according to Morgan Stanley.
  • China, Germany, and the US have also floated various fiscal stimulus measures, including a payroll tax cut, deficit spending, and interest rate cuts.
  • Morgan Stanley says those fiscal policies may also eventually disappoint.
  • Visit Business Insider SA's homepage for more stories.

A wave of monetary stimulus is expected to hit the global economy in the coming months, but it might not be enough to prevent a recession.

According to Morgan Stanley's chief economist, a combination of low interest rates, rising debt levels, and trade-policy uncertainty has created an environment where monetary policy won't be as effective as it used to be.

"Declining natural interest rates have meant that monetary policy by itself will not be enough to stimulate aggregate demand and lift inflation expectations," Chetan Ahya, Morgan Stanley's Chief Economist said in a note to clients on Sunday.

He continued: "Cyclical developments have made matters worse. Trade policy uncertainty is pushing global growth to a post-crisis low."

The commentary comes as fears of a global recession have begun to boil over amid alarming economic data from such large economies as Germany and China.

The US has also seen a closely watched segment of the so-called yield curve - which tracks the spreads between short- and long-dated Treasury bonds - invert for the first time since 2007. The most recent inversion added to existing concerns of an economic slowdown as the occurrence has preceded every recession since 1950.

"Lingering trade-related uncertainty has put the wheels of a global slowdown in motion," Ahya said.

This confluence of factors leaves fiscal policy measures as the preferred avenue for avoiding a recession.

Germany, China, and the US have all suggested different fiscal methods outside of monetary easing in order to shore up their economies in the face of a looming recession. But Morgan Stanley remains unimpressed. In the end, the firm thinks the situation may be too far gone for some overarching solution.

"Political and legal constraints leavel ittle room for aggressive fiscal action in the near term," the Morgan Stanley analysts said. "While some fiscal stimulus is under way this year, we expect limited further expansion next year."

For your reference, here are the fiscal measures recently floated by each country, with accompanying commentary from Morgan Stanley. Spoiler alert: it's probably not best to get your hopes up.


Germany: Deficit spending

While Germany isn't engaged in deficit spending currently, the country is reportedly considering the option should growth slow to an alarming rate.

Ahya said Germany would only pursue deficit spending in the case of a "severe recession," and if there's a plan to wind-down the extra borrowing in the future.

Our expectations for a larger German fiscal boost would probably increase if growth was so slow more than we forecast," he added. "Rather than proactive and swift, we believe that any additional stimulus from Germany will likely be reactive and gradual."

The German government also said it would allocated up to $55 billion (R841 billion) to boost consumer spending and employment in the event of a prolonged downturn.


US: Payroll tax cut

President Trump suggested his administration could jolt the US economy with a short-term payroll tax cut to encourage consumer spending.

According to Morgan Stanley's analysts, reducing the social security payroll tax from 6.2% to 4% would increase disposable income by about $250 billion (R3 trillion). The firm's US Public Policy Strategist Michael Zezas said that a payroll tax cut would require congressional approval, and given the upcoming election cycle, the odds of passing major legislation seem slim.

"Bipartisan agreement appears unlikely until we see a severe growth slowdown," Ahya said.


China: Infrastructure spending

Ahya believe China has the most flexibility to implement "meaningful" fiscal easing.

China already injected a $250 billion (R3 trillion) stimulus package into its economy earlier this year that included tax cuts and reducing the corporate sector's contributions for social security. But, diminishing corporate confidence could be dampening its impact.

Morgan Stanley expects further stimulus from China to be "defensive" and to most likely be announced if downward pressure on growth continues. The firm's lead China Economist Robin Xing predicts the country will deploy an additional $100 billion (R1.5 trillion) to $125 billion (R1.9 trillion) worth of stimulus through infrastructure spending.

"With continued trade uncertainty weighing on external demand and private investment, and policy-makers maintaining a tight grip on lending to the property sector, we expect overall GDP growth to remain relatively weak at ~6%Y," Ahya said.

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