>GLOBAL FORECAST SNAPSHOTS (MORGAN STANLEY

The Global Economy in One Place

• Bottom in place: Following three quarters of outright declines, global GDP returned to positive, though very subdued, growth (quarter-on-quarter) in 2Q09, according to our latest estimates, and thus even a tad earlier than we expected two months ago (see Exhibit in report).

• Asia leads, US and Europe lag: Global bottoming entirely reflects a bounce in Asia in recent months, led by China initially and now becoming visible in Japan, India and other parts of the region. Also, Latin America, especially Brazil, appears to have turned up. The US and Europe (West and East) are lagging and have yet to turn around – still a story for later this year, we think.

• The deepest recession, the weakest recovery: We continue to look for a very tepid global recovery, and the risk of setbacks along the path is high. On our forecasts, global GDP will only return to its pre-recession peak level of 2Q08 by the middle of 2010. In the G-10 advanced economies, only about half of the total GDP peak-to-trough loss of some 4.5% during the recession will have been recouped by the end of 2010.

• Bouncing between L and V: Risks around our baseline scenario are unusually high in the face of an unprecedented shock and an unprecedented policy response. We present updated ‘reasonable’ bull and bear scenarios that describe V- and L-shaped paths (p. 5-7). Reality will
probably lie somewhere in between, but markets may well switch between expecting one or the other several times over the next few quarters.

• Central banks won’t dare to rock the boat: We expect most major central banks to keep rates at current exceptionally low levels until well into 2010 (p. 11). Also, quantitative easing will likely be unwound only very gradually. Thus, excess liquidity is likely to grow further in the foreseeable.

To see full report: GLOBAL FORECAST