Morgan Stanley sees 30% risk of world recession

Morgan Stanley sees 30% chance of global recession
Morgan Stanley sees 30% chance of global recession   

Morgan Stanley has hiked the probability of a recession hitting the global economy within the next year to 30 percent from 20 percent.

The U.S. bank also cut its baseline forecast for world economic growth to 3.0 percent in 2016.

"While we don't believe that a global recession is likely this year, the declining impact of lower oil prices and easier monetary policy on growth starts to worry us," said Morgan Stanley economists led by Elga Bartsch in a report sent on Monday.

Morgan Stanley attributed the downgrade to a slowdown in developed market growth led by the U.S. It now forecasts that U.S. economic growth will slow to 1.7 percent this year and 1.6 percent next, from 2.4 percent in 2015.

YinYang | E+ | Getty Images

It is not the first U.S. bank this year to voice concerns on the state of the global economy. In February, Citigroup strategists led by Jonathan Stubbs warned of the possibility of a "significant and synchronized" global recession and a "modern-day equity bear market."

Then in March, the International Monetary Fund warned of rising risks to the world economy and urged governments to take action.

Morgan Stanley added in its report that that given the low-growth environment, the global economy remained vulnerable to shocks. These could include a loss of control of financial conditions by the U.S. Federal Reserve, the European Central Bank or the Bank of Japan, and volatile international capital flows to emerging markets, particularly China. Then there are geopolitical risks due to the conflict in the Middle East and the inflows of refugees in Europe and Turkey.

Economic risks:

  • Central banks losing control of domestic financial conditions
  • Volatile international capital flows

Political risks:

  • The Middle East conflict
  • The European refugee crisis
  • 'Brexit' referendum in the U.K.
  • Impeachment scandal in Brazil
Thousands of demonstrators protest against Brazilian President Dilma Rousseff on March 13, 2016
Raphael Alves | AFP | Getty Images
Thousands of demonstrators protest against Brazilian President Dilma Rousseff on March 13, 2016

Another ECB cut?

Morgan Stanley forecast the European Central Bank would cut its deposit rate by another 10 basis points to minus-50bp in the third quarter of this year. That's despite the raft of stimulus measures announced by the central bank's president, President Mario Draghi, last week, which included a 10bp cut to the already-negative deposit rate. Draghi said that he did not anticipate reducing rates any further.

Morgan Stanley added that the U.S. Federal Reserve, which will report its latest policy decision on Wednesday, will likely only make one hike this year.

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