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Global recession warning rattles stock markets

Morgan Stanley says the world economy is ‘dangerously close to a recession’

Morgan Stanley has warned that the global economy is teetering on the brink of a recession, and slashed its growth forecasts. Fears that the world is sliding into a double dip recession are weighing on global stock markets, which resumed their recent falls on Thursday.

Morgan Stanley said the world economy is “dangerously close to a recession”. “While we had been calling for a ‘BBB’ recovery in developed markets all along, the path now looks even more Bumpy, Below-par and Brittle than previously thought,” the US investment bank said in a note, adding that emerging markets were not immune either.

It cut its global growth forecast to 3.9% from 4.2% this year, and to 3.8% from 4.5% next year. Growth in developed market economies is now estimated at just 1.5% this year and next. A recession is defined as two or more consecutive quarters of contraction.

The FTSE index in London dropped 76 points to 5255 in early trading, a decline of 1.4%, with mining and banking stocks among the biggest fallers.

Germany’s Dax and France’s CAC lost 1.6% and 1.5% respectively. In Asia, Japan’s Nikkei closed down 1.25% while Hong Kong’s Hang Seng fell 1.2% and the Shanghai Composite ended the day 1.6% lower.

Wall Street closed little changed on Wednesday, with the Dow up just 4.28 points at 11,410.21.

Brent crude oil fell 0.4% to 0.16 a barrel. The Swiss franc tumbled against the euro and the dollar amid talk that the Swiss National Bank was injecting liquidity to stop the currency’s surge.

The latest UK labour market data painted a worsening picture, with unemployment rising sharply, especially among women and young people. The grim global outlook and turmoil in financial markets prompted the Bank of England’s monetary policy committee to discuss a fresh round of quantitative easing at its meeting a fortnight ago, and its two hawkish members abandoned their calls for higher interest rates.

Jane Foley, senior currency strategist at Rabobank, noted that sterling has eked out modest gains against the euro since the start of this week, and strengthened by 1.7% against the dollar. “The better tone in the pound is despite that fact that every piece of UK economic news released this week has layered on even more gloom. Declining house prices, falling real wages, rising unemployment and an increasingly dovish central bank are not usually factors that would be associated with a stronger currency. However, these are not usual times. As ever, it is the nature of the FX market not to view the fundamentals of one currency in isolation. The better tone in sterling this week reflects even greater concerns about the outlook for the euro and the dollar,” she said.

At Franco-German crisis talks in Paris on Tuesday, Angela Merkel and Nicolas Sarkozy urged closer economic co-ordination and called for a Europe-wide tax on financial transactions to prevent the disintegration of the single currency.

Gary Jenkins, head of fixed income at Evolution Securities, said: “The European sovereign debt crisis is likely to remain a feature of markets for some time, but if we see a sharp slowdown in economic activity it could threaten fiscal consolidation in core countries such as France and exacerbate the crisis.”

Jenkins noted that one bank borrowed 0m (£300m) for a week from the European Central Bank on Wednesday. “It is the first time a euro area bank has borrowed dollars from the ECB since February. While one shouldn’t read too much into one transaction it could be another indication of tension in money markets.”

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