US Bear Case: Off the rails (35%). No positive intervention or development at all until at least 2013
US Base Case: The muddle in the middle (50%). Our base case is an unsatisfying muddle-through in both the US and Europe over the coming months. Politicians will avert a near-term train wreck but not put the train on track toward a long run destination.
US Bull Case : Two good plans presented in 2012, one gets picked an implemented (15%). The election contest presents two coherent, opposing remedies that offer clarity and efficiency. The American people decide in November, and newly elected officials have a mandate to implement the preferred program in spring 2013.
Europe Bear Case: Breakup of eurozone and defaults (25%)
Europe Base Case: The muddle in the middle (60%). We do not think that authorities get to where they need to go in 2012, but our base case is that they are mostly successful in signaling in 2012 that they are on the right path in a series of unsatisfactory summit meetings.
Europe Bull Case: Fiscal Union is promptly and effectively implemented (15%)
Morgan Stanley also has a forecast on China
Policy Easing Limits the Downside Risks to Growth in China
Growth deceleration has been less sharp than we expected, so far. The direction and timing of the slowdown are in line with our forecasts, and the magnitude is slightly smaller than we originally expected. More specifically, the deceleration in export and property investment growth is less significant, while infrastructure investment had a more pronounced slowdown than we previously envisaged in 4Q11.
The worst time for sequential growth is likely to be already behind us. In our view, the growth moderation has slowed in pace towards year-end and will likely be reversed in early 2012. With policy easing starting in late 2011, we expect sequential growth to pick up again in 1Q12 from the trough levels in 4Q11. Nonetheless, due to the high base effect, GDP growth in year-on-year terms will likely hit a bottom in 1Q.
We believe that the following factors should help to boost sequential growth in 1Q12:
• Monetary easing: As far as financial conditions are concerned, the sharpest tightening took place in 3Q, when sequential M2 growth slowed to +11.6%Q (in seasonally adjusted annualised terms, sa ann) in September. However, after the RRR cut and the fiscal deposit drawdown in December 2011, liquidity conditions have eased slightly in the absence of significant sterilisation, which induces a rebound in broad money and credit growth rates. Given that the lag between financial conditions changes to growth in China is approximately three months, we believe that sequential growth will likely have a slight rebound soon in 1Q12.
• A boost from fiscal expenditure: The year-end fiscal spending spree seemed to be greater than usual in December 2011. According to the PBoC, fiscal deposits declined by Rmb1,213 billion last month, compared to Rmb936 billion in December 2010, an increase of 29.5%Y. Other anecdotal evidence such as the late arrival of holiday decorations in cities and the civil servant retiree wage raise in late December also suggest that the turn of fiscal policy stance was belated but significant.
Policy-makers will likely ease the policy stance further without a high-profile announcement. Given the relatively moderate slowdown in growth, the authorities see few reasons to adopt a meaningful policy stimulus to boost people's confidence, like last time in 2008. To a large extent, this bout of policy easing is to reverse partially the policy tightening against inflation in 2010-11, instead of reflating the economy out of a recession. In addition, top decision-makers are concerned that any property policy easing could lead to a potential backfire against their tightening earlier. As a result, policy easing measures will likely come in by small installments without much media fanfare in the backdrop.
We expect RRR cuts and credit easing along with support to private sector-driven FAI, and partial relaxation of property purchase restrictions. In view of the remaining inflationary pressure in the system and the agenda of interest rate liberalisation, we believe that the PBoC will keep the policy rate unchanged, while injecting liquidity through RRR cuts and more support for investment from moral suasion and fiscal expenditure. In view of the shortage of central bank notes coming to expiration in the next two months, the adjustment in RRR will likely become unavoidable. Meanwhile, the priorities of credit easing measures will be set to facilitate investment in rural irrigation, subway systems, environment and energy saving, and technology upgrades driven by private sectors. Meanwhile, an incremental relaxation of purchase restriction implementation by local governments will likely be acquiesced to lower the intensity of property policy tightening.
But we believe that the renminbi will continue to appreciate against the dollar, and reach 6 yuan per dollar by year-end. Despite the easing bias in domestic monetary policy and a decline in FX inflows, China will likely continue to appreciate its currency as a reaction to rising trade protectionism globally. Admittedly, from a pure economic theory perspective, real appreciation of the CNY has been significant (through both nominal appreciation and higher inflation) since 2005, which may not leave the currency far from being fair-valued. However, the political economy side of this issue suggests that China will likely continue to depend on this peaceful approach to resolve trade conflicts, especially on the back of G3 growth weakness and upcoming political elections in multiple trading partner countries. We maintain our out-of-consensus call on rapid appreciation of the CNY against the dollar by 4.5% in 2012 to reach 6 yuan per dollar by year-end
Morgan Stanley's global Economic forum has other predictions
India Economics: Next Debate – Duration of Growth Slowdown
The depth of India's growth slowdown will be at least as bad as in 2008-09, if not worse, based on our favorite leading indicator for assessing the near-term growth outlook - M1 growth. And this time, lack of aggressive monetary policy action, no room for counter-cyclical fiscal expansion, and weak global capital markets imply that a V-shaped recovery is unlikely. Long duration of slowdown would mean that the banking sector could pose macro stability risks.
US Economics: Fed Thoughts for 2012 – Into the Heart of Darkness
We expect the Fed will pull a few policy levers in the first half of 2012. As forecast in our December 27 note, the minutes of the December FOMC meeting revealed that policy interest rate expectations will henceforth be included in the quarterly survey of FOMC participants. In addition, we expect the Fed will lower its forecast of growth and inflation in the next few months so that a disinflation risk has re-emerged, and will launch QE3 sometime during the first half.
Morgan Stanley's Vincent Reinhart makes a very specific QE3 (Quantitative Easing #3 by the US Federal Reserve) call.
Eventually though, we believe that a package of Treasury and MBS purchases of US$500-750 billion will arrive some time between March and June.
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