Analyst and market expectations for the global recovery are growing dimmer, and the risk to these gloomier outlooks is further to the downside, suggest two new research reports.

“Market pricing suggests that investors now expect a significant slowing of global growth, as U.S. jobs growth disappoints, Europe adopts austerity, and China slows due to tighter policies,” says UBS Ltd. in a new report.

Swiss banking giant UBS believes that some of the doom and gloom is overdone, and that the economy will recover, albeit slowly.

“De-leveraging in the private sector (household and financial) in the advanced economies will restrain activity, as will a gradual tightening of policies in many emerging economies,” it says, but points out that, “Considerable adjustments have taken place and income growth is likely to be strong enough to sustain recovery.”

UBS sees a 55% probability of its base case scenario of a weak recovery coming true. The risks are, however, skewed to the downside, it concedes, with just a 10% chance of faster growth, and a 35% chance that “a sharp global slowdown or renewed recession” emerges.

BMO Capital Markets economists lower growth expectations

Economists at BMO Capital Markets are among those that are lowering their growth expectations, and pushing out expectations for rate hikes in most of the developed economies into late 2011 or 2012. They also see a host of downside risks to their gloomier outlook, including: the risk that North America’s recovery could falter if Europe’s credit crisis flares again; increased damage to the Gulf Coast states from the Deepwater Horizon oil spill; and further weakness in U.S. home sales.

A weakening of the housing market that causes prices to drop would increase foreclosures and reinforce the weakness in bank lending, it says, adding, “If housing tanks again, the recent soft patch in the U.S. economy could become a sinkhole.”

In Canada, BMO worries about the housing market, too. For one, it says that a housing bubble could emerge if demand and prices reaccelerated, “as the resulting loss of affordability could lead to a sharp correction when interest rates normalize.” Alternatively, it suggests that the housing market “could cool more rapidly than we anticipate if pent-up demand is thoroughly exhausted.”

A further worry in the U.S. is the long run impact of its financial regulatory reform. BMO cautions that, “measures to curb risk taking and raise capital levels could have a longer-term restraining effect on lending and growth”, adding, “Similarly, the Basel III proposals to increase the quantity and quality of bank capital will likely lead to some reduction in bank lending and higher funding costs.” Although it notes that the proposals are not expected to take effect for a couple of years.

IE