August 18, 2011 – Spooked by Europes intensifying debt crisis, political chaos and signs the U.S. economy is stalling, analysts at Morgan Stanley and Goldman Sachs once again downgraded their global economic forecasts on Thursday.
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Those gloomy economic downgrades, coupled with fresh jitters about the euro zone, sparked a 500-point plunge on the Dow Jones Industrial Average in early trading.
Morgan Stanley cut its 2011 gross domestic product forecast to 3.9%, down from 4.2% previously. Goldman Sachs now sees U.S. GDP growth of 2% through the first quarter of 2012 and then 2.5% thereafter.
The U.S. and Europe are dangerously close to recession, Morgan Stanley analysts wrote in the note, according to Bloomberg News. Recent policy errors, especially Europes slow and insufficient response to the sovereign crisis and the drama around lifting the U.S. debt ceiling, have weighed down on financial markets and eroded business and consumer confidence.
Supporting the more bearish economic calls, the Philadelphia Feds business conditions index plummeted to -30.7 in August, indicating a contraction and badly missing forecasts for 3.7. That extremely negative reading fueled heavier selling on Wall Street.
Even before Thursday's Philly Fed report, Goldman Sachs economists warned it sees a one-in-three risk of a double-dip recession, which is technically defined as two consecutive quarters of GDP contraction. The nations unemployment rate will be at 9.25% by the end of 2012, even higher than current elevated levels, Goldman predicted.
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According to Goldman, the biggest three risks for the U.S. economy are: a worsening of the European crisis, a failure to extend the U.S. payroll tax cut that is set to expire at the end of the year and the tendency of rising unemployment rates to feed on themselves.
Morgan Stanley analysts downgraded their GDP forecasts for the Group of 10 nations to 1.5% this year and next year. Previously, it predicted growth of 1.9% this year and 2.4% in 2012.
A negative feedback loop between weak growth and soggy asset markets now appears to be in the making in Europe and the U.S., Morgan analysts wrote, Bloomberg reported. This should be aggravated by the prospect of fiscal tightening in the U.S. and Europe.
William Dudley, the president of the powerful Federal Reserve Bank of New York, told business leaders on Thursday that growth this year has been anemic and he has revised his forecasts lower. However, Dudley said he believes the chances of another recession are quite low.