Morgan Stanley sees ‘policy-induced slowdown’

A leading economic forecaster has lowered its prediction for growth this year and next, thanks in part to expected spending cuts from Washington.

Morgan Stanley said in a research note that it has cut its global growth forecast for 2011 to 3.9 percent from 4.2 percent. And it said its cutting its 2012 forecast to 3.8 percent to from 4.5 percent. That amounts to a full percentage point of combined growth over the two years.

Why? The bank points to what it calls a "policy induced slowdown" -- in other words, a slowdown caused by government policies. It says:

There are three main reasons for our downgrade. First, the recent incoming data, especially in the US and the euro area, have been disappointing, suggesting less momentum into 2H11 and pushing down full-year 2011 estimates. Second, recent policy errors — especially Europe's slow and insufficient response to the sovereign crisis and the drama around lifting the US debt ceiling — have weighed down on financial markets and eroded business and consumer confidence. 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.

Fiscal tightening is financial-speak for government spending cuts. In other words, Morgan Stanley's economists, like most of their colleagues in the field, think that spending cuts will hurt growth, at least in the short term. And they also note that the recent drama over raising the debt ceiling didn't help matters.