Morgan Stanley has become the first major Wall Street firm to predict a recession in the US economy come 2008.
A strong economic downturn has already been anticipated by many investors as mortgage defaults have snared many lenders, but Morgan Stanley deepened the sense of crisis in the US economy by providing its own dark outlook.
The financial services giant predicted that 2008 yearly growth would be as low as one per cent, well below other international forecasts and reflecting an ever more pessimistic outlook on the US.
Predictions were made by top Morgan Stanley economists Richard Berner and David Greenlaw on the firm's Economic Forum website, where further figures were provided, including predictions of zero per cent growth in GDP.
Berner and Greenlaw said that the tightening in credit conditions and the slump in business capital spending "sound like the recipe for a serious recession, so why do we think it will be mild?".
They also reiterated the centrality of mortgages to the health of the economy, claiming: "There's little prospect for a recovery in housing anytime soon. We think overall housing starts will run below one million units in each of the next two years a level not seen in the history of the modern data since 1959."