Economists at Morgan Stanley are cutting their global GDP forecasts for 2009, saying they now anticipate the first synchronized worldwide downturn since World War II.

“For the second month in a row, we are slashing our 2009 global forecasts for real GDP growth,” it says in a research note. “We now expect growth of just 1.7%, down from 2.5% just a month ago, and half a point below the IMF’s just-released outlook. Thus, we now think that the depth of the global downturn will be similar to the 1991 recession, when global GDP growth fell to 1.5%.”

“What makes this downturn different, however, is that it is likely to bring the first synchronized full-year contraction of output in all the major advanced economies since World War II,” it adds. “We now see GDP in the advanced economies shrinking by 0.9% next year (compared with -0.1% last month). We’ve cut our GDP forecast for the developing and emerging world from 5.1% to 4.3% — the lowest level in seven years.”

Morgan Stanley says that these revisions reflect two recent developments: shocks hitting the emerging market economies are likely to hobble growth by more than it expected; along with the deepening financial crisis in September-October and the fact that increasing economic difficulties in many emerging economies have started to blowback on developed economies.

“Despite the recent deterioration, we continue to think that the global economy will trough in the course of next year, with a healing process setting in during 2H09 and in 2010,” it says.

“The key reason why we are forecasting a deep recession followed by recovery rather than a depression is our belief that massive recent and forthcoming policy action by central banks and governments will get traction next year,” the firm notes.

That said, while concerted aggressive monetary and fiscal policy action is expected to pull the global economy out of recession during next year, Morgan Stanley expects the coming recovery in late 2009 and 2010 to be anemic rather than dynamic. “Our first stab at 2010 global GDP growth comes out at 3.6%, clearly below the trailing five-year and ten-year trend rates of 4.7% and 4.0%, respectively. In the advanced economies, we expect that 2010 GDP will rise by barely more than 1% in the euro area and Japan, and by scarcely more than 2% in the US. In the emerging world, we see 2010 GDP growth at 5.4%, up from 4.3% in 2009 but still less than in any single year during 2003-08,” it says.

Global inflation is likely to fall sharply into 2009 in response to the plunge in commodity prices and emerging slack in both product and labour markets in the developed and EM economies, it observes. “We have lowered our global inflation forecast for 2009 from 4.6% previously to 3.8%, down from a likely outcome of 6.2% in 2008. In fact, we now see headline inflation dipping into negative territory in the U.S. in 2009 and believe that a deflation scare is likely,” it adds.

The firm cautions that the risks to its 2009/10 growth forecasts are still skewed to the downside as further financial shocks may lurk and policy may not find traction as early or by as much as it currently expects. “We cannot rule out 1% global growth, as occurred in 1982,” it allows.

IE