There is a near one in three chance the world economy will slip back into recession this year as low oil prices and extraordinary monetary stimulus have a dwindling impact on global growth, Morgan Stanley has warned.
The US investment bank said a "low growth environment" had made the world vulnerable to a litany of shocks, including fears that central banks have lost control over domestic financial conditions, while rising political risks from Europe to the Middle East threaten to overwhelm governments.
Global growth is forecast to hit just 3pc this year, down from Morgan Stanley's earlier estimate of 3.3pc, with advanced world growth falling to 1.5pc.
Japan received the biggest single downgrade of any country, with GDP slashed in half to just 0.6pc from 1.2pc.
Noting that world GDP fell to 2.3pc in the last quarter of 2015 - below the 2.5pc threshold which marks a recession - Morgan Stanley raised their global recession risk probability from 20pc to 30pc.
"The renewed slowdown in global growth late last year has pushed the risk of a recession higher," said Elga Bartsch at Morgan Stanley.
Despite a record crash in global oil prices over the last 20 months - widely seen as a tax cut for the world's oil consumers - the positive effects of lower oil prices were not as pronounced as previous eras, said the investment bank.
It noted that fuel high taxation in many countries meant many consumers were failing to see the full benefits at the pumps, while investment was collapsing in major producer countries such as the US.
Contrary to many expectations, consumers in the advanced world have also failed to spend the windfall from lower prices, opting instead to pay down debts and save. Lower consumption levels have thus weighed down on economic activity.
"The global economy does not seem to be as responsive [to lower oil prices] as it has been in the past", said Ms Bartsch.
Their bearish outlook was also driven by the inability of central banks "to pull the global economy out of its low-growth, lowflation rut".
The European Central Bank redoubled its efforts to revive growth and inflation in the eurozone last week, announcing its first foray into corporate bond buying, slashing interest rates, and providing a series of cheap loans to commercial banks.
Eight years after the financial crisis, the measures mean the ECB's balance sheet will finally overtake that of the US Federal Reserve and Bank of England at more than 20pc of the bloc's GDP, according to JP Morgan.
But analysts noted that investors were no longer in thrall to central bank action. The euro strengthened and equities fell in the immediate aftermath of the unexpectedly large stimulus package.
Faltering market confidence is worrying for policymakers as it "could undermine the effectiveness of monetary policy" much of which is aimed at weakening exchange rates to boost inflation.
"Repeated easing initiatives seem to have a diminishing effect on financial markets, portfolio reallocation and economic sentiment", said Ms Bartsch.
Tighter financial conditions and moderate growth has forced the investment bank to slash its initial expectation of three interest rate hikes from the Federal Reserve this year, to just one. US growth is expected to slow to 1.6pc this year, down from 1.8pc.
Morgan Stanley also expect the ECB to end the year with a -0.5pc deposit rate and the Bank of Japan to carry out another 20 basis point cut to its already negative rate by July.
"The global economy is still stuck in a low-growth environment characterised by weak demand dynamics, subdued investment spending, low inflation rates, elevated unemployment, as well as modest wage and productivity gains. This leaves us vulnerable to shocks," said Morgan Stanley.