Morgan Stanley cautioned that the United States and Europe are dangerously close to recession due to the wrong policy they have adopted to curb the economic problems.
In a statement issued by the biggest investment bank said, "Our revised forecasts show the US and the euro area hovering dangerously close to a recession - defined as two consecutive quarters of contraction -- over the next 6-12 months."
Morgan Stanley blames the slow European response to the eurozone's mounting sovereign debt problems. And for the US Morgan Stanley said that US is struggling because of political battle over raising its debt ceiling. The market as well as consumers got nervous because of their mal-handling of the situation.
"A negative feedback loop between weak growth and soggy asset markets now appears to be in the making in Europe and the US. This should be aggravated by the prospect of fiscal tightening in the US and Europe," Morgan Stanley said.
For the moment, the combination of cash-rich companies, oil prices falling from their highs earlier this year and rate-cutting by central banks appear more likely to prevent a plunge into a "double-dip" recession, after the 2008-2009 collapse of growth, the bank said.
The bank also said that next six months from October to March would be critical for the US economy, "when we may see some fallout from the heightened volatility of risk markets... and when we get an automatic tightening of fiscal policy if, as our US team currently assumes, this year's fiscal stimulus measures will expire."
Morgan Stanley predicts global economic growth of 3.9% in 2011 than last year’s 4.2% growth.
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