CNBC - Morgan Stanley: Risk of a Global Recession is High and Rising

Article by Thomas Franck in CNBC financial

The downtrend in some global economies is becoming contagious as weakness in the manufacturing sector begins to spread, according to Morgan Stanley, which warned clients that “the wheels for a slowdown are in motion.”

“Even as we have been revising our growth projections lower, we continue to highlight that the risks remain decidedly skewed to the downside,” Chetan Ahya, the bank’s chief economist, warned in a note published Tuesday. “We expect that if trade tensions escalate further ... we will enter into a global recession in three quarters.”

The risk of tighter financial conditions, which would trigger a global recession, “is high and rising,” he added.

Despite claims that the U.S. remains an exception to the global deceleration, the effects of the international slowdown are already filtering into American data, the economist wrote. Ahya highlighted the “significant loss of momentum” in payrolls data in the past seven months, falling to 141,000 on a six-month moving average in July from 234,000 in January.

But recent manufacturing barometers have also been of concern. The IHS Markit Manufacturing Purchasing Managers’ Index fell to 50.4 in July, down from 50.6 in June, its lowest level since September 2009. Signals above 50 signal expansion while those under 50 represents contraction.

“Falling business spending at home and declining exports are the main drivers of the downturn, with firms also cutting back on input buying as the outlook grows gloomier,” Chris Williamson, chief business economist at IHS Markit, said on Aug. 1. “US manufacturers’ expectations of output in the year ahead has sunk to its lowest since comparable data were first available in 2012.”

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