SINGAPORE: The global economy looks likely to slip into a deeper recession next year, with only a modest recovery expected in 2010. This is according to Morgan Stanley, which has revised its global growth forecast for 2009 downwards from 2.5 per cent to 1.7 per cent.

Those likely to be hit hardest are Asian economies with high volumes of exports to the United States. These economies will suffer as US consumer spending slows.

Slowing demand in key markets like Europe and the US is one of the key factors behind Morgan Stanley's move to cut its global growth forecast for next year.

For 2010, it expects growth at 3.6 per cent, well below the average of some 4 per cent seen in recent decades. The global economic slowdown is also expected to hit growth in emerging markets.

Joachim Fels, Morgan Stanley, said: "I think we have seen two things at the same time happening in Europe and the US. We are seeing the impact for the latest round of the financial crisis on the real economy, so all the indicators in Europe and in the US are pointing to a very sharp slowdown - both in domestic demand and also in export growth.

"We have seen capital flowing out of emerging markets, so we're seeing (a) very sharp slowdown in emerging markets. In Central and Eastern Europe – and also increasingly in Asia – this is hampering prospects both for the developed countries and also for the other emerging markets."

Countries with strong account deficits such as Australia, India and Indonesia are also expected to feel the pinch of the global slowdown.

Many countries in Asia with high levels of exports to the US will be hit by slowing consumer spending in that market.

Morgan Stanley has lowered growth forecasts of countries such as China. It now expects China to see growth of 7.5 per cent for next year, down from its previous forecast of 8.2 per cent, despite the country's recent stimulus package.

Asia, excluding Japan, has been downgraded from 6.4 per cent to 5.5 per cent. Other Asian country downgrades include India, from 6.5 per cent to 5.5 per cent; Korea, from 3.8 per cent to 2.7 per cent; and Singapore, from 0.2 per cent positive growth to minus 2 per cent.

Any rebound for the world's economy is also likely to be a slow one, hampered by continuing credit restraints, negative wealth effects and higher capital costs.

Mr Fels said: "The US and the European consumers are already starting to slow down now, and I think the slowdown will play out over the beginning of next year. I would not look for a recovery until the middle of next year. I think we will get a recovery in the second half of next year, but it will be a very slow, very tepid one."

Going forward, Morgan Stanley said further risk could be on the cards, with questions hanging over whether implemented policies could have enough traction to deal with further financial shocks.


- CNA/so