The probability of the US economy slipping into a recession is on the rise — and stocks still have much further to fall despite a months-long slump, the investment chief of Morgan Stanley Wealth Management said in a note to clients this week.
Morgan Stanley’s Lisa Shalett projected that the chances of an economic recession have doubled to more than 50% as the Federal Reserve aggressively hikes interest rates to combat inflation.
Based on the prediction, the economy is going to decrease for two quarters before beginning to recover again in the second quarter of upcoming year, led by a rise in asset.
Due to mounting concerns about the limited Russian natural gas supply, declining consumer as well as corporate confidence as well as rising costs, the prognosis has been weakened. On the other hand, the economists at Morgan Stanley wrote, “the risks around the outlook have intensified.”
They claimed that the European Central Bank may increase its deposit rate notwithstanding the slowing in the economy at each meeting the current year so that it is going to reach 0.75 percent in December.
Aside from the pandemic-induced 2020 recession, other recent recessions have been credit-driven, including the Great Financial Crisis of 2007-2008 and the dot-com bust of 2000-2001. In those cases, debt-related excesses built up in housing and internet infrastructure, and it took nearly a decade for the economy to absorb them.
By contrast, excess liquidity, not debt, is the most likely catalyst for a recession today. In this case, extreme levels of COVID-related fiscal and monetary stimulus pumped money into households and investment markets, contributing to inflation and driving speculation in financial assets.
The current situation is a result of a preceding decade in which U.S. assets have massively outperformed global assets, creating a demand for dollars as well as a defensive posture in many economies over the past few years causing other countries to overbuy U.S. dollars.
If the weakening of the U.S. dollar occurs, it could mean a windfall for emerging markets that have had weaker currencies, especially those that are commodity producers. This impact is already showing up with emerging markets outperforming the U.S.
Equities in the month of June with the Vanguard FTSE Emerging Markets ETF down 2% this month while the S&P 500 is down 4.9% in the same time period. Emerging markets haven’t outperformed U.S. equities since 2009, according to Shalett.
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