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Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and head of Macro Research.
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And I'm Michael Gapen, chief U.S. economist.
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And I'm Chetan Aiya, Chief Asia Economist.
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And I'm Jens Eisenschmidt, Chief Europe Economist.
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And today is going to be our third quarter economic roundtable taking a wide angle view on the global economy and all the key forces shaping our outlook and the economy. It's Monday, July 20th at 10am in
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New York and 4pm in Frankfurt and
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10pm in Hong Kong.
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Since our last roundtable in April, the global economy has continued to face all sorts of shocks. A mix of resilience and friction. Inflation pressures have not disappeared. Energy and geopolitical risks have come up, they've receded, they've come back, they've receded all over the place. But there is one underlying source of momentum that we have to talk about and that is the AI driven CapEx cycle. Michael, let me turn to you because the US is a real focal point of all of this. Tell me a little bit about where Morgan Stanley Research is thinking about hyperscaler Capex, how big it is. And then for you, when you think about the US economy, just how big of a driver is it for what we're looking for in the US we
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continue to revise higher our estimates for hyperscaler and AI related capex in the US economy. We were thinking a little over a trillion for 2027. Now we're more like 1.2, 1.3 trillion, maybe as high as 1.4 trillion in 2028. So the level of hyperscaler spending continues to keep rising. The growth rate and its effect on the economy is likely to slow. But as you noted, it's still a major driver of momentum in the us you would look at that headline number and think wow, that's 3.5% or so of GDP. Must be a massive source of momentum for GDP growth. But roughly about 60% of that hyperscaler CAPEX spending goes to items like computers and peripherals, equipment spending categories that have a very, very high import content. We still get a significant number that AI CapEx is probably contributing around 40 basis points to growth this year. Be a similar sized amount perhaps next year. So for an economy that's growing somewhere a little bit above 2% right now, maybe closer to 2.5% next year, that's a non trivial amount. We just have to remember it's fueling growth around the world, just not here in the us.
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Yeah, that's a really great point because I have seen some estimates where people say, well, if it wasn't for AI CapEx, the US economy wouldn't have grown at all. And that's clearly wrong, as you point out. But US imports are necessarily exports from somewhere else and change. And if I can pull you into the story, then US firms are buying a lot of AI related equipment from Asia. What does that mean in your part of the world? And in particular I'm thinking about Korea, Taiwan and maybe some other economies in Asia. What's the critical story there?
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So for Asia, this has definitely been a big boon. If you look at Asia's exports, they have been booming. And particularly for the ones which are exporting semiconductors to the US they are seeing semiconductor exports growing by 90%. And when we go back in time and compare Asia's semiconductor exports, it's very tightly linked to the US IT Capex. And it's not surprising when Mike Gapin mentions about the imports going up, it's on the other side helping Asia's exports quite meaningfully. So so far we have seen this benefiting Korea, number one, Taiwan and also Japan. All these three are big beneficiaries of US AI CapEx and of course also not just us but the other countries which are doing any little amount of CapEx on AI front that's also helping these three economies in the region.
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You've been doing a lot of work Chetan recently about how much the story can actually broaden out that the AI Capex cycle has really contributed to Asian growth, but it doesn't tell the whole story that there's a broader industrial cycle. Can you give us a little bit of a flavor of that story?
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That's right, Seth. So we are actually highlighting that there is a capex and industrial super cycle that is underway in Asia. And there are four components to this story. AI and semiconductors CapEx which we just briefly discussed. Number two is energy, number three is defense, and number four is industrial supply chain onshoring related CapEx. I know that everybody still thinks that AI is the most important part of this story, but when I gave you the numbers and the breakup of that. So for Asia, AI and semiconductor companies, capex is about $380 billion in 2026, but energy capex is going to be $900 billion. So this is a far broader story than just AI.
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But Mike, let me come back to you and to the US Then. So isn't the growth story also broader than that as well domestically? So what's going on in terms of consumer spending in the US and is there a broader capex story in the US as well?
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I would say is it broader than that? I think maybe you could argue also it's narrower than that. Here's what I mean by that. As I noted, AI CapEx contributing about 40 basis points to growth. It's certainly underpinning equity valuations in the US and underpinning strong wealth creation. About $180 trillion in household net worth in the US about $55 trillion of that has been created in just the last five years alone. Underpinned in part by AI related spending and optimism about future profitability. That's really supported spending by upper income households. So I think it's both investment led and consumer led, but they're inextricably linked. So the positive for the US is that it's providing a lot of resilience. The negative component of that is it feels like momentum in the US is narrowly driven.
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Let me maybe jump in here from Europe to provide some perspective from the other side. So I think it's a fair summary to say that AI investment is not yet, or maybe will never get there, dominating the business cycle. What we do have instead is unusually consumption driven expansion that has to do not so much with an extraordinary strength of consumption, but more with an absence of other factors. Now prospectively looking forward, we think the fiscal expansion might help lifting us a little bit. And then it is really the debate how, how much AI investment can arrive in Europe. For now, I would say it's probably a factor of 20 that separates European investment plans from the plans we know that exist for the US.
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Let me stick with you then in Europe because you brought up fiscal as one of the factors going on here and where it's going. You and your team recently wrote a blue paper talking about what the outlook is for fiscal policy in Europe. And in particular we had this era of cheap debt. Interest rates in Europe were low, at times negative. It was super easy to borrow. Not as much happened then there's been a shift towards more fiscal expansion at the same time that interest rates have gone up, causing the cost of debt to go up. Feels like there's a lot of push and pull going on. Can you unpack for us a little bit what was in that paper you wrote? What's going on with fiscal policy in Europe, especially in Germany, and what it might mean over time for euro area countries?
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Yeah, so I think fiscal policy in Europe really is looking at a regime shift. So there is this very famous probably in the US Even more so than here notion that the Europeans have built a very comfortable welfare state. And that's true. If you just look at the accounting from a GDP perspective, it's close to 50% that you know, budgets are actually extended on welfare spending. And now you have three structural headwinds for, for any, any type of fiscal spend. So one is aging related costs, you mentioned it already. Defense spending has to increase significantly and the interest rate costs will also rise significantly. All of that means there will be very hard choices to be made. The one thing that actually could help here is growth. Growth is the one thing that's for now at least missing, at least in comparison to the U.S. it's probably half what we expect, what the U.S. colleagues think is in the stake for the U.S. and a quarter or even less than that of what is there in Asia. So growth is really the key, the solution, the answer to everything. In Europe, more growth than just 1%, which is potential, would help solving that fiscal challenge. For now it looks really, really like an uphill battle. Returning to Germany, it's the one country that has a very good fiscal starting position. They are pushing a lot, but they're to some extent pushing the strings. So even with the German huge fiscal package, given that private sector investments so far absent, doesn't get us a ton of growth.
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Chetan, maybe I'll come back to you before we close part one of this roundtable. The AI capex cycle started with AI, broadened out further. How long do you expect this cycle to last? How durable can it be and how might it Compare to previous CapEx cycles?
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Yes, so we think this will be a multi year CAPEX cycle. And when we are thinking about the duration of the cycle there are two things that I would keep in mind. Number one is that most of the drivers that we just discussed, the capex on AI energy, defense and industrial supply chain, onshoring related investments, these are all structural drivers. So we think these are going to continue for some more time. At this point of time we have the visibility for this cycle to be lasting for three, four more years. And then the second point of framework that I would keep in mind is that the corporate balance sheets are in a pretty good shape. So when you are thinking about the leverage in the private sector, you can look at both households and the corporate sector balance sheet. But since the cycle is capex driven, we are looking at the corporate balance sheets and they are in a pretty good shape across the region. Corporate debt to GDP is below where it was in 2019.
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Mike, let me Wrap up quickly with you. We talked about AI, AI CapEx for now. That's a very strong demand story. We when are we going to see a supply side of things coming from AI? Are you already seeing a big contribution to GDP and growth from productivity coming from AI?
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We are, but not outside of the high tech sectors. And we're seeing limited what I'll call labor market restructuring of tasks and occupations beyond high AI exposed occupations. So right now everything is still very isolated. I think maybe as we get into 2029 and beyond. So as Chetten says we probably have a three to four year super cycle here around a build out phase. Then we might see some of that broader base diffusion to other non tech sectors in the economy.
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All right, Nyens for you. Let's wrap up here. So what is the state of play for the build out in the CAPEX cycle for AI in Europe?
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Yeah, it's very early stages. As I said before, we really be connected to all the industry experts or analysts covering the sector and the total plans are a factor of 20 below what we see in the US by just the seven hyperscalers. So I would say very fragmented, very small in general, not only AI. I think the one thing I would be looking at for any type of sign of revival, sign of growth is investment. The second would be investment and you can guess what the third would be investments in the core countries. That's really what we need to see and we haven't seen much in Germany or France on this front.
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That's a great place for us to stop. Today we talked about the real side of the economy, AI Capex, trade. Tomorrow we're going to come back and we'll talk about how that growth outlook affects inflation. And once you start talking about growth and inflation you got to talk about policy. And that's where we'll be tomorrow. Mike, Jens and Chetan, thank you for joining today and to the listeners, thank you for listening. Be sure to tune in tomorrow for part two of our conversation. And I have to say if you enjoy this show, please leave us a review wherever you listen and share thoughts on the market with a friend or a colleague today.
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