Morgan Stanley
  • Research
  • Sep 11, 2015

Global Macro: The Pros and Cons of Getting Stuck in the Middle

At the end of a sluggish summer, the world economic outlook has dimmed, but the growth cycle is intact, Morgan Stanley’s global economics and strategy teams argue—and investment opportunities abound.

Fits and starts. They’ve been the story of the global recovery for years. There may be no such thing as ensemble world growth—while some economies are booming, others struggle. Yet, for the past few years, the balance has trended up.

After hard-won gains in the spring, momentum slowed this summer. Entering the year-end stretch, global growth can’t seem to kick into a higher gear, amid new uncertainties in emerging markets, currency swings, and weak commodities, all of which have implications for how companies and policy makers will adjust, as well as potential opportunities for investors willing to look beyond the short term.

The growth trajectory has shifted lower, but it still points up, according to Morgan Stanley Research’s Global Economics Team in its recent annual Global Macro Outlook report, titled “Growth Gets Stuck in Middle Gear.” Just how much lower? The team has trimmed its 2015 estimate for global growth from 3.4% to 3.1%, and its 2016 forecast from 3.9% to 3.4%.

“Easy monetary policy, falling oil prices and looser fiscal policy should support growth,” says Elga Bartsch, co-head of global economics research. “However, we remain cautious on emerging markets, where the slowdown in China and future Fed rate hikes will likely create new cyclical challenges.” The US economy is expected to maintain sufficient momentum for the Federal Reserve to begin to raise its key interest rate, most likely in December (Read more about the outlook for the US economy and Fed policy).

Global GDP Growth Set to Recover after a Little Lull

Source: National data, IMF, Morgan Stanley forecasts

Emerging-Market Drag

For the most part, global growth has managed to lurch over any number of hurdles since rebounding from the financial crisis in 2008. When one stalwart economy faltered, for example, Europe amid its serial Greek debt problems, another (often China) has picked up the slack. Around the world, central banks have coordinated efforts against deflation, and fought more localized skirmishes against lowflation, by cutting interest rates or launching aggressive fiscal stimulus.

For the most part, these efforts have paid off. Until recently, the focus this year had turned to how central banks, such as the Federal Reserve, the European Central Bank and the Bank of Japan, would pivot from stimulus to tightening.

Now, the slowdown in emerging markets has become a bigger drag. Amid flat or weaker demand, these economies, which depend on trade to drive growth, must deal with overcapacity. “Emerging markets will likely remain in an adjustment phase over the next few quarters,” says Chetan Ahya, co-head of global economics. The team has cut its 2015 growth estimate from 4.8% to 4.1% for emerging-market economies. By the end of next year, however, growth is expected to return to around 4.8%, as cyclical issues become less acute and expected policy stimulus counters structural issues.

In the meantime, developed-market economies could feel the knock-on effects. At the macro level, US and European central bankers in particular have been tracking stronger inflation signals, such as steady or improving employment data and wage pressures. But weaker commodities and emerging-market currencies may dampen those signals.

Many companies are also far more exposed to emerging markets than ever before. They are likely to feel the slowdown directly in their bottom lines. More broadly, corporations may pare back capital expenditures, already lackluster relative to past expansions. Any retreat on the corporate investment front could have broad repercussions on productivity, labor demand, revenues and profits.

Potential Output Growth Headed Lower, Especially in Emerging Markets; Developed Markets Subdued

Source: IMF, Morgan Stanley Research forecasts

Looking Past the Fear

The good news: This looks like a short-term speed bump that will likely translate into a longer expansion cycle overall. From where we’re sitting now, stuck in the middle, that may offer cold comfort, but for those with longer-term horizons and vision, opportunities abound.

“Keep calm and lean against it.” That’s the core advice from Morgan Stanley’s Global Strategy Team in its Global Strategy Autumn Outlook report, “Cycle Slower, Not Over.” Says Chief Cross-Asset Strategist Andrew Sheets: “Our forecasts for growth, inflation, and policy rates have come down, but the global cycle remains intact.”

Morgan Stanley Research Real GDP Forecasts

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Source: Morgan Stanley Research forecasts; Note: Red indicates downward revision from previous forecast; Above aggregates are PPP-weighted. MW Global is weighted by long-term market exchange rates and is offered for comparison.

The recent market volatility and growth scare can be an opportunity to reposition for the eventual bounce. Some of the advice from the Global Strategy team:

  • Look to markets that can deliver attractive returns, given lower-growth assumptions.
  • Focus on quality companies in still healthy markets like the US—or Japan, where company-level dynamics are strong.
  • Search for cyclically “cheap” markets, such as Europe, or value in oversold sectors, such as energy and financials.
  • Explore emerging-market credit assets that might offer longer-term value.

Of the recent fear levels, Sheets says: “Times like these make it all the more important to step back and assess why things feel so bad and whether the sell-off can last.” So far, he sees more opportunity than reasons to panic.

For more Morgan Stanley Research on the outlook for global real estate as interest rates in key markets seem set to rise, ask your Morgan Stanley representative or a Financial Advisor for the full reports, “Global Macro Outlook: Growth Gets Stuck in Middle Gear” (Aug 31, 2015) and “Global Strategy Autumn Outlook: Cycle Slower, Not Over” (Aug 31, 2015), as well as other region- and country-specific reports. Plus, more of our latest ideas.

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