MORGAN STANLEY: The 7 biggest risks to the global economy

Cover all your bases.

That’s the tone of Morgan Stanley’s note Monday that tracked the route of the global economic recovery.

“While our base case view is for a continued, moderate expansion, we acknowledge that the risks to our global growth forecasts are skewed towards the downside,” the Morgan Stanley analysts wrote.

The analysts highlighted monetary easing, falling oil prices and inflation as key risks.

Scroll down for the seven key risk scenarios that could shake up markets across the globe.


The US dollar appreciates, the Fed holds steady, and consumer spending drops

caption
Federal Reserve Chair Janet Yellen looks at a colleague.
source
REUTERS/Robert Galbraith

What could happen:

In Morgan Stanley’s “risk scenario,” the US dollar continues to appreciate at a pace, and despite inflation coming in below target the Fed does not ease monetary policy.

That creates volatility in risk assets like equities, and together with weaker growth that impacts consumer sentiment and spending.


Political uncertainty and a strong euro weighs on investment in Europe

What could happen:

Continued economic weakness could weigh on capital expenditure and productivity, according to Morgan Stanley.

No growth and a stronger euro could see the Euro Area shrink for a period of three or six months, leading the European Central Bank to extend quantitative easing into 2017.


Japan takes a hit from weaker global demand

source
Reuters

What could happen:

A slow recovery in consumer spending could see the recovery in capital expenditure falter. Export demand falls and financial markets correct.


China’s efforts to ease prove ineffective

caption
Bystanders look at a car that has partially fallen into a small sinkhole along a street in Beijing, China, September 6, 2015.
source
REUTERS/Stringer

What could happen:

Morgan Stanley’s risk scenario includes an acceleration in capital outflows, forcing China’s central bank to tighten monetary policy at a time when “underlying disinflationary pressures are persistent.”


India stalls on critical reform efforts

source
Danish Siddiqui/Reuters

What could happen:

Losses in local elections could force Indian prime minister Narendra Modi to abandon fiscal consolidation plans, and trigger increased spending.

That in turn could hit investor confidence in the country, leading to a slowdown in investment and a weakening of the currency.


Brazil returns to old policies

caption
Members of the Homeless Workers’ Movement (MTST) protest against the Confederations Cup being held in Brazil, amidst burning tyres in front of the National Mane Garrincha Stadium in Brasilia June 14, 2013
source
Reuters

What could happen:

The government could cut taxes and rates in a bid to stimulate growth. That though could lead to rising bond yields, as investors doubt the country’s ability to repay its debt load.

The currency could weaken further, causing inflation to spike.


A falling oil price and an international fallout hit Russia hard

caption
Obama meets with Vladimir Putin during the G8 Summit at Lough Erne in Enniskillen.
source
Reuters

What could happen:

The falling oil price could destabilise the currency, forcing central bank rate hikes and potentially capital controls.

That could combine with fresh sanctions, which would trigger capital outflows.


source
YouTube / Warner Bros

Globalization could be doomed – here’s a chilling preview of what that world could look like