World Economy

Europe could be on the brink of a 'political triple jump', Morgan Stanley warns

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Growth in the global economy could accelerate to 3.4 percent in 2017 but the outlook is clouded by political risks, Morgan Stanley has warned.

The investment bank warned uncertainty regarding a new administration in the U.S., the start of Brexit negotiations and key elections across Europe could undermine global growth.

"With the Italian referendum, the French presidential election and the German general election, we are essentially attempting a political triple jump in Europe," Elga Bartsch, global co-head of economics at Morgan Stanley, said on Monday.

"Matteo Renzi will likely lose the referendum on the constitution, but we don't expect that to pave the way for an early election into the first half of next year," Bartsch said.

The investment bank expects the euro zone to grow 1.4 percent in 2017 but it is "conscious" of the political risks to such forecast. There are several crucial European elections in 2017 and investors will be eyeing the results closely amid an increasing support for populist parties.

A growing presence of populist parties in politics could affect global trade, monetary policy and ultimately the stability of the European Union, the bank advised.

"That we think is a real concern because the risk has a quite close connection between globalization, productivity growth and investment spending, so if there is a backlash against globalization that will just not hit international trade but it would also likely hit global integrated supply chains and will make it much more difficult for companies to make investment decisions," Bartsch said Monday.

Furthermore, populism could also derail projections of a tapering in the European Central Bank's quantitative easing programme, Barstch told CNBC.

For now, Morgan Stanley is predicting that the ECB will start tightening its monetary policy stance around September of next year.

A late-cycle fiscal stimulus, faster rate increases in the U.S. and a U-turn in globalization could also add to uncertainty, according to the bank.

Higher growth expectations coupled with higher inflation prospects could lead countries such as the U.S., Japan and Germany to ease fiscal policy. The central banks in U.S., Japan and U.K. have said they will give room to some inflation overshooting, but, according to Morgan Stanley, none of the central banks "will be sitting on the sidelines forever."

U.K. economy has surprised but a slowdown remains the scenario for 2017

Morgan Stanley is more optimistic on the performance of the U.K. economy in 2017 compared to its summer outlook, despite the country's decision to leave the EU. However, its pace of growth is set to drop from 2 percent in 2016 to 1 percent in 2017.

Weaker investment and lower unemployment rates, along with an increased inflation and a weaker Sterling are driving the slowdown.

"Economic performance will be dominated by the exit negotiations," the bank said in its report, adding that the negotiations "will therefore also be potential trigger for fiscal stimulus."

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