Global growth fears pounds stocks again

FRANKFURT: European stock markets tanked on Thursday following downgrades of global economic growth from key investment banks which said that another recession could not be ruled out.

Exchanges in Frankfurt, London, Madrid, Milan and Paris plummeted by two to four percent in afternoon trading.

A huge sell-off over concerns that the United States and Europe might begin to contract again has wiped trillions in value off world stock markets in the past couple of weeks.

The US investment bank Morgan Stanley said that "our revised forecasts show the US and the euro area hovering dangerously close to recession." The bank has cut its 2011 global growth outlook to 3.9 percent from 4.2 percent, and the 2012 forecast to 3.8 percent from 4.5 percent.

Mature economies could expand by just 1.5 percent this year and next, it added, mainly owing to "recent policy errors in the US and Europe plus the prospect of further fiscal tightening in 2012."

At Deutsche Bank, economists focused on the effect that slower growth in China would have on the rest of the world.

Steffen Dyck, Jochen Moebert and Oliver Rakau foresaw a "soft landing" for the Chinese economy this year and next, but concluded that "global stock markets will likely be negatively impacted by a Chinese slowdown."

They forecast Chinese growth of 8.9 percent this year, down from 10.3 percent in 2010, and a further decline to 8.3 percent in 2012, "mostly due to the effect of monetary tightening."

China has begun to clamp down to curb inflation that reached 6.5 percent in July, its highest level in more than three years, as the government struggles to rein in dangerously soaring food costs.

The Deutsche Bank analysts noted that China now accounts for more than nine percent of global gross domestic product, compared with less than two percent in 1980.

For the 17-nation eurozone, Elga Bartsch at Morgan Stanley said: "We are cutting our numbers by a full percentage point over 2011-12, and now expect GDP growth to average only 0.5 percent next year (considerably below our previous forecast of 1.2 percent)."

The 2011 forecast was lowered to 1.7 percent from 2.0 percent.

"While not our base case, at this stage, we see a material risk of outright recession," she added.

Second quarter growth figures out earlier this week showed that the German economy, which has driven European growth over the past few years, had stalled with a 0.1 percent increase.

In neighbouring Austria, central bank chief Ewald Nowotny said in an interview posted on the website of Austrian business magazine Wirtschaftsblatt that a new recession was "unlikely".

"Personally I believe we will more likely go in the other direction, like Japan, into a long period of low growth but also with low inflation," said Nowotny, who is also a member of the European Central Bank's governing council.

Meanwhile, analysts braced for expected bad news from the United States later on Thursday, when data on inflation and homes sales were to be released.

However, analysts at the US bank Citi's equity strategy unit forecast a global rebound in stock markets that have declined by about 20 percent from their 2011 highs, citing the "still low" probability of a collapse in corporate profits.

Copyright AFP (Agence France-Presse), 2011