Thoughts on the Market

2026 Global Outlook: Slower Growth and Inflation

Date: November 17, 2025
Participants:

• Serena Tang, Morgan Stanley Chief Global Cross Asset Strategist
• Seth Carpenter, Morgan Stanley Global Chief Economist

Episode Overview

This episode presents the first in a two-part conversation on Morgan Stanley’s 2026 Year Ahead Outlook. The focus is on the global macroeconomic backdrop for the coming year—examining trends in growth, inflation, and the influence of AI-driven investment, as well as expectations for central bank policies across key regions including the US, Europe, China, and Japan.

Key Discussion Points & Insights

Global Growth: Slowing, But Resilient

• 2025 as a Year of Transition: Global growth has slowed due to tariffs and policy uncertainty. However, recession has been avoided largely thanks to consumer spending and AI-driven investments.
  (00:21–00:43) Serena Tang

• 2026 Projection: Morgan Stanley expects further, but moderate, slowdown in global growth, with inflation continuing to drift lower in most regions.

  • Notably, there are differences (“heterogeneity”) between major economies, and a distinct possibility of surprises in 2026.

  • Specifics by region:

    • US: Further short-term slowing, especially late 2025 into early 2026, before some re-acceleration in the latter half of the year.
      (00:51–01:23)
    • China: Continued weak growth, hindered by a persistent deflationary spiral; unlikely to meet its 5% growth target.
      (01:23–01:29)
    • Europe: Tepid, unremarkable growth (just over 1%); central bank believes it has accomplished its goal regarding inflation, but fiscal policy and slow disinflation will keep growth subdued.
      (01:29–01:42)

  • Quote:

    “Next year may well be a year for surprises.”
    — Seth Carpenter (01:43)

Drivers & Risks

• US as the Primary Driver: The trajectory of global growth in 2026 depends largely on the US, which sits at an inflection point between strong spending and weak employment data.
  (02:13–03:10)

• Downside & Upside Scenarios:

  • Risks center on the labor market: If employment weakness is a true signal, recession risk rises (though it would likely be mild given low unemployment and strong AI-oriented investment).

    • If, however, consumer and business spending stays resilient—particularly amongst higher-income households and business CapEx for AI—growth could surprise to the upside.
      (03:10–03:45)

  • Quote:

    “If we did get that recession, it would be mild... But spending could just stay strong and we might see this upside surprise where the spending really dominates the scene.”
    — Seth Carpenter (03:19–03:35)

Central Bank Policy Outlook

• US Federal Reserve:

  • Further rate cuts expected, with the policy rate moving to just above 3% by mid-2026—roughly at a “neutral” rate.
  • Fed will prioritize supporting the labor market, especially with jobs data likely to show periods of negative job creation in coming months.
  • Approach mirrors other developed markets but is more proactive.

• European Central Bank (ECB):

  • While President Lagarde asserts the disinflation process is complete and the current 2% rate is appropriate, Morgan Stanley expects sluggish growth and continued disinflation, leading the ECB to cut rates further (likely to 1.5%).

• Bank of Japan (BOJ):

  • Only major central bank currently hiking rates, with another rate hike likely at the December policy meeting. Further hikes postponed until at least 2027 as inflation trajectory remains uncertain.

  • Notable Quote:

    “The Fed's actually got a few more rate cuts to get through... by the time we get to the middle of next year... just a little bit above 3%.”
    — Seth Carpenter (04:05–04:20)

The Role of AI: Demand Now, Supply Later

• CapEx and Demand:

  • AI has boosted economic demand via business investment—spending on data centers, semiconductors, etc.—which is keeping growth buoyant and contributing to current inflation.

• Productivity and Supply:

  • Productivity gains from AI (supply-side effects) should arrive in coming years—but in 2026, demand effects still outweigh supply.

  • Morgan Stanley estimates an additional 0.25pp in productivity growth for 2026 due to AI, but this is not enough to be notably disinflationary right away.

  • Quote:

    “For 2026, and it’s important that we focus it on the near term, the demand side is much more important than the supply side... But we still think inflation ends 2026 notably above the Fed's inflation target. And it's going to make five, five and a half years that we've been above target.”
    — Seth Carpenter (06:37–07:22)

Numbers at a Glance

• Global GDP Growth:

  • About 3% (Q4 over Q4 basis)

• US GDP Growth:

  • About 1.75%, similar to 2025; stronger in the second half

• Inflation:

  • Expected to remain above target in the US through end-2026

• Quote:

  “About 3% growth—a little bit more than that for global GDP growth... For the US in particular, about 1 and 3/4%.”
  — Seth Carpenter (08:22–08:33)

Memorable Moments & Quotes (with Timestamps)

• “Next year may well be a year for surprises.” — Seth Carpenter (01:43)
• “If we did get that recession, it would be mild... But spending could just stay strong and we might see this upside surprise where the spending really dominates the scene.” — Seth Carpenter (03:19–03:35)
• “The Fed's actually got a few more rate cuts to get through... by the time we get to the middle of next year... just a little bit above 3%.” — Seth Carpenter (04:05–04:20)
• “For 2026... the demand side is much more important than the supply side... But we still think inflation ends 2026 notably above the Fed's inflation target.” — Seth Carpenter (06:37–07:22)
• “About 3% growth—a little bit more than that for global GDP growth... For the US in particular, about 1 and 3/4%.” — Seth Carpenter (08:22–08:33)

Timestamps of Important Segments

• Global Macro Overview & Outlook: 00:00–02:06
• Drivers of Growth & Downside Risks: 02:06–03:45
• Central Bank Policy Expectations: 03:45–06:15
• AI’s Economic Impact: 06:15–08:17
• Outlook By the Numbers: 08:17–09:19

Tone and Style

The conversation is thoughtful, measured, and analytical, with Seth Carpenter repeatedly emphasizing uncertainty and the importance of watching incoming data. The dialogue mixes technical assessment (rates, productivity, capex) with accessible explanations on why these factors matter for growth and inflation.

This episode sets the stage for the next, which will cover detailed investment strategies for 2026 across asset classes and regions.