Market Watch

[Joemoney]

Morgan Stanley: Recession Risk Remains

HONG KONG (Reuters) - The U.S. economy could slip back into recession later this year on faltering consumer demand, with interest rate cuts again shaking the global financial markets, investment bank Morgan Stanley said on Thursday.

"There's a 40 percent chance that U.S. GDP growth could turn negative some time in the second half of this year," Stephen Roach, chief economist at Morgan Stanley, told reporters via a video conference from London.

"If that were to occur, one of the bigger surprises will be that the next move of the U.S. Federal Reserve will not be to tighten interest rates, but actually to cut interest rates," Roach said.

Morgan Stanley said it has revised down its estimate of growth in world trade volume in 2002 to 2.9 percent from an earlier 3.2 percent, and to 8.2 percent from 8.6 percent in 2003.

"That's usually a leading indicator of cuts we're about to make to our world GDP forecast. We have a very sluggish outlook for global trade growth," Roach said.

The U.S. investment bank is still forecasting global GDP growth of 2.7 percent in 2002 and four percent in 2003, but could soon revise the figures downwards.

Asian economies will be particularly hard hit given the region's high export dependency.

"There's a urgent imperative for Asia to focus increasingly on domestic demand. But it's very difficult to convert a culture of savings into a culture of spending. It's a long haul and it won't change over two to three years," Roach said.

Roach said the bank was retaining its baseline scenario of a seven percent depreciation of the U.S. dollar in each of 2002 and 2003, but hiked the chances of a "hard landing" to 15 percent from five percent.

Morgan Stanley defines a hard landing as the U.S. dollar depreciating by more than three percent per month.

"Like any overvalued asset whose fundamentals are negative, there's always the chance you could accelerate on the downside," he added.

The dollar has lost almost six percent of its value against the yen (JPY=) and 7.65 percent against the euro (EUR=) so far this year, weighed down by fragile stock market sentiment and a looming current account deficit.

It fell to a 17-month low of $0.959 against the euro (EUR=) on Thursday and remained vulnerable across the board.

"The U.S. dollar is in the early stages of a multi-year correction. It will take the dollar down at least 20 percent trade weighted, we've probably accomplished about one fourth of that move," Roach said.

http://biz.yahoo.com/rb/020620/economy_usa_recession_1.html