Morgan Stanley chief global economist Seth Carpenter warned that “the worst of the global economic slowdown is ahead of us” on a recent edition of the firm’s Thoughts on the Market podcast entitled Tracking the Coming Slowdown. Mr. Carpenter believes there is a “brewing storm” of recession risks worldwide.
Thanks to Russia, recession risks are centered in Europe. The higher energy costs resulting from geopolitical factors is a cost shock that will limit growth. There are industries already rationing energy to save costs at the expense of production, contributing to the slowdown. Consumer purchasing power has been sharply curbed by rising energy bills.
Mr. Carpenter is also concerned about the U.K. economy where recently announced fiscal stimulus measures will only lessen the depth of a likely recession. The U.K. is subject to higher energy costs despite leaving the EU and trade relationships remain problematic.
Morgan Stanley does not believe that a recovering Chinese economy can significantly offset a global slowdown. It forecasts below-consensus GDP growth of 2.75 per cent for 2022, well below potential. Ongoing upheaval in the country’s housing market, combined with COVID lockdowns, will limit growth to 5.25 per cent in 2023, according to Mr. Carpenter. This growth is not strong enough to be a “game changer” for developed economies in his estimation.
Pointing to the continued strong jobs growth in the country, the economist expects the United States to avoid a recession. However, the Federal Reserve will not stop raising rates until growth slows dramatically. For Morgan Stanley, this means that in the short term “there is only downside” for economic and earnings growth.
Canadian investors should be cautious about adding economically sensitive exposure, including non-energy commodities and industrials, to their portfolios in the near term. Bargains in these sectors may appear if a slowdown takes hold.
The Morgan Stanley podcast is available on Apple podcasts here and Spotify here.
-- Scott Barlow, Globe and Mail market strategist
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Compiled by Globe Investor Staff