Tuesday, March 16, 2010

[Morgan Stanley Strategy Forum] Downside Risks Mounting for Global GDP in 2011

Introduction: Today we examine the economic backdrop, and first Joachim Fels addresses some recent
changes to our forecast numbers. Then Dick Berner analyzes the Fed outlook, Henry McVey (from MSIM)
offers his views on the markets, and Graham Secker looks at European equities. But first I want to touch on
the growth vs. liquidity debate, on which I am relatively indifferent. See the scenario grid in the Appendix on
page 6. The upper-right quadrant represents our base case for higher growth but growing concern about
liquidity withdrawal. On the upper left side, we see where the consensus resides right now, looking for
decent growth and a Fed on hold
. The bottom panels reflect more of a pure growth concern, which is not our
base case, and is probably more of a 2011 story. In three out of four of these scenarios, we see the markets
capped and/or weakened — and we can’t support the sanguine consensus outlook represented by the upper
left quadrant.

Global Economics
Downside Risks Mounting for Global GDP in 2011

Our view on the global economics team is that 2010 global GDP will surprise on the upside, while interest
rates are going higher. We published our updated Global Forecasts Snapshots on March 10, and we continue to
forecast global GDP growing by an above-consensus 4½% this year, despite a downgrade in Europe. Emerging
markets are clearly the expected growth leaders, while in developed markets we still project a triple-B recovery —
bumpy, below-par, and brittle. But we do think that even in developed markets we could get some positive growth
surprises over the next couple of quarters.

Morgan Stanley Strategy Forum

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