Banks lower US economic growth forecasts

Citigroup Inc and JPMorgan Chase & Co cut their US growth forecasts as the global economy slows and officials struggle to stem Europe’s sovereign-debt crisis.

Gross domestic product will grow 1 per cent in the fourth quarter rather than the 2.5 per cent previously forecast and 0.5 per cent in the first quarter of 2012 instead of 1.5 per cent, JPMorgan said in a note e-mailed to clients on Friday. Citigroup cut its 2011 growth forecast to 1.6 per cent from 1.7 per cent and lowered its projection for next year to 2.1 per cent from 2.7 per cent, according to a note to clients dated yesterday.

Global stocks dropped on Friday, European shares suffered their biggest two-day slump since 2008 and oil sank below $80 a barrel on concern the recovery in the world’s largest economy is faltering and Europe’s debt crisis will worsen. Morgan Stanley this week cut its forecast for global growth in 2011 and said the US and Europe are “dangerously close to recession.”

“The next four quarters we don’t see growth that is much faster than the growth that took place in the first half of this year,” said Michael Feroli, JPMorgan’s chief US economist in New York. “Global growth has disappointed and foreign growth forecasts have been taken lower. Risks of a recession are clearly elevated.”

More than $6 trillion has been erased from the value of global equities this month on signs of a slowing US economy and speculation that European banks lack sufficient capital. Regulators from the US, South Korea and Sweden said the market turmoil posed further risks to growth, after reports yesterday showed American jobless claims rose and Philadelphia-area manufacturing shrank in August by the most since 2009.

‘Political Paralysis’
Citigroup economists Steven Wieting and Shawn Snyder wrote that they were lowering their forecasts because of potential “political paralysis” in the US and fiscal tightening steps. They also trimmed their estimates for the Standard & Poor’s 500 Index’s earnings-per-share this year to $97 from $98 and to $101 from $105 next year.

The positioning of the economy and pace of recovery so far “do not suggest a new cyclical recession, rather an inability to mount a full recovery,” they wrote. “We see corporate profits growing at a quite low single-digit pace in coming years even with the assumption of continued economic expansion.”

JPMorgan reduced its growth forecasts for the next two quarters because consumer sentiment has “tumbled” and “the housing market shows little sign of lifting,” Feroli said.

Still, “declining energy prices should help to cushion some of the weakness in the economy, and the still-low levels of cyclically sensitive spending could reduce the chances of getting a negative GDP quarter,” he said.