Global Growth Faces an Energy Test

Summary

Podcast Summary: Thoughts on the Market – "Global Growth Faces an Energy Test"

Host: Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research
Date: May 14, 2026
Duration: ~5 minutes
Theme: This episode discusses Morgan Stanley’s newly published mid-year outlook, focusing on how oil prices, AI-driven investment, and consumer spending are shaping global economic growth under the lens of an acute energy shock.

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Episode Overview

Seth Carpenter delivers an insightful overview of Morgan Stanley's mid-year global economic forecast, with a sharp focus on three intertwined forces: oil (and the broader energy shock), artificial intelligence (AI), and consumer dynamics. The episode dissects the uncertainty brought on by volatile oil markets, the divergent impact across regions, and the key role of AI-related investments in supporting US and, by extension, global growth. It also covers evolving inflation and central bank policy responses.

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Key Discussion Points and Insights

Baseline Global Economic Outlook

• Forecasted Growth:
  • 3.2% global real GDP growth in 2026
  • 3.4% in 2027 (slightly below 2025’s 3.5%)
  • “In our baseline, growth slows modestly this year and then stabilizes and recovers.” (Seth Carpenter, 01:05)

The Energy Shock: Risks and Scenarios

• Central Uncertainty:
  • The energy shock introduces “unusually high uncertainty” to the outlook, affecting inflation, growth, and widening the range of possible outcomes.
  • “Writing a forecast is always hard, but knowing what to assume about oil prices is even harder than ever.” (Seth Carpenter, 01:24)
• Base Case:
  • Assumes crude returns to about $90/barrel by year-end 2026, declining further in 2027.
  • If normalization of oil shipments occurs, the shock is absorbable.
• Downside Risk:
  • Continued or worsening disruptions could push oil above $150/barrel.
  • Greater threat: “We could shift from a price shock to a volume shock... shortages can stop [activity].” (Seth Carpenter, 02:01)

Regional Exposure to the Energy Shock

• China:
  • Least exposed due to substantial oil stockpiles and recent import reductions.
• Europe:
  • Most exposed—energy price increases “show up much more quickly in household bills, business costs and ultimately inflation.” Also vulnerable to natural gas costs as a net energy importer.
• United States:
  • Sits between China and Europe; is a net exporter of petroleum, but consumers will still face higher prices at the pump.

United States: Growth Resilience and AI Investment

• Growth Drivers:
  • “US Growth continues to support global growth, thanks largely to strong AI related capital spending and consumer spending that's being buoyed by the top end of the wealth distribution.” (Seth Carpenter, 03:05)
• Outlook:
  • US real GDP growth forecast at 2.25% in 2026, rising to 2.5% in 2027 (up from 2.1% in 2025).
• AI Capital Expenditure:
  • Core to the outlook—encompasses data centers, power infrastructure, information processing equipment, and software.
  • Momentum in AI investment expected “to broaden out” general business investment.

Inflation and Central Bank Policy

• Inflation Dynamics:
  • Global headline inflation expected to “rise notably, almost to 3% in 2026 before coming back off in 2027.”
  • Energy prices are pushing headline inflation, but “the pass through to core... stays mostly limited” depending on the economy.
• Monetary Policy Response:
  • US Federal Reserve: Expected to stay on hold through 2026; possible rate cuts in first-half 2027 if inflation falls.
  • European Central Bank: Expected to hike rates twice in 2026 due to energy-driven inflation, then ease in 2027.
  • Bank of Japan: Likely to continue gradual rate hikes.

The Bottom Line

• US still provides a strong foundation for global growth, largely due to AI and resilient consumer spending.
• The uncertain energy outlook will continue to dictate how turbulent the global path may be: “AI investment and consumer spending are all what's driving the economy for now, but the energy outlook will determine how bumpy that path gets.” (Seth Carpenter, 04:38)

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Notable Quotes & Memorable Moments

• On Forecast Complexity:
  “Writing a forecast is always hard, but knowing what to assume about oil prices is even harder than ever.” (01:24)

• On Risks of a Prolonged Energy Shock:
  “If the current situation persists and we do not see a normalization of shipments of oil, it could spell recession. That scenario probably sees oil prices surge through $150 a barrel, but more importantly, we could shift from a price shock to a volume shock.” (01:39)

• On Regional Exposure:
  “Europe is the most exposed, and the US sits in between.” (02:30)

• On What’s Driving the US Outlook:
  “AI capex sits at the center of this US outlook. It includes data centers, power infrastructure, information processing equipment, software...” (03:20)

• On Central Bank Responses:
  “We expect the Fed to now stay on hold all the way through 2026 and then, if inflation really does come down, to be able to cut twice in the first half of 2027.” (04:08)

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Key Timestamps

• 00:00 – 01:24: Introduction; broad framing of the global outlook and emergence of oil, AI, and the consumer as pivotal forces.
• 01:24 – 02:10: Deep dive into the energy shock, with scenarios for oil price normalization versus prolonged disruption.
• 02:10 – 03:05: Geographic breakdown of exposure—China, Europe, US.
• 03:05 – 03:45: US economic resilience, AI investment momentum, consumer spending.
• 03:45 – 04:38: Inflation forecasts, monetary policy responses (Fed, ECB, Bank of Japan).
• 04:38 – 05:13: Closing thoughts – continued growth foundations versus the unpredictable energy outlook.

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Summary Takeaway

Morgan Stanley's mid-year economic outlook hinges on the interplay of a disruptive energy shock, surging AI-driven investment, and persistent consumer strength—making the global economic path highly uncertain. While the US and its robust AI investment provide a source of resilience for global growth, the severity and duration of the energy shock will serve as a key test for inflation, monetary policy, and regional economic trajectories in the coming years.

Transcript

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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. Today I want to talk about our mid year outlook that was just published. It's Thursday, May 14th at 10am in New York. Oil, AI and the consumer now sit at the center of our global economic outlook, with AI and the consumer driving economic momentum. In the US the key question is whether the energy shock stays manageable or changes the path for inflation, central banks and recession risks. We have had and maintain a fundamentally constructive view on global growth. But the energy shock brings unusually high uncertainty. It boosts inflation, it weighs on growth, and it widens the range of outcomes. We forecast global real GDP growth at 3.2% in 2026 and 3.4% in 2027. That is relative to about 3.5% in 2025. So in our baseline, growth slows modestly this year and then stabilizes and recovers. Writing a forecast is always hard, but knowing what to assume about oil prices is even harder than ever. Now, our base case assumes that crude returns to about $90 a barrel by the end of this year and declines further in 2027. If, and I do mean if, that happens, the global economy can likely absorb the shock. But if the current situation persists and we do not see a normalization of shipments of oil, it could spell recession. That scenario probably sees oil Prices surge through $150 a barrel, but more importantly, we could shift from a price shock to a volume shock. The big risk is physical shortages and supply chain disruptions because it's not just energy and it's also petrochemical inputs to manufacturing and other items. Higher prices, slow activity. Shortages can stop it. Exposure to the energy shock differs sharply across regions. Among the major economies, China looks the least exposed, Europe is the most exposed, and the US Sits in between. China built up substantial stockpiles of oil and part of why the global oil market has not seen higher oil prices so far is that China has cut back on those imports dramatically. Europe, on the other hand, typically faces faster energy pass through, meaning energy prices show up much more quickly in household bills, business costs and ultimately inflation. Europe is a net importer of energy, so the consideration goes beyond oil to include natural gas. The US is a net exporter of petroleum products, but US consumers will feel the pinch at the gas pump. But even with that in mind, US Growth continues to support global growth, thanks largely to strong AI related capital spending and consumer spending that's being buoyed by the top end of the wealth distribution. We expect that momentum to continue and then ultimately to broaden out. And so we forecast US real GDP growth at about 2.25% in 2026, but rising to about 2.5% in 2027. Both of those are up from the 2.1% we saw last year and AI capex sits at the center of this US outlook. It includes data centers, power infrastructure, information processing equipment, software over time, we think this investment momentum is part of what allows a broadening out of business investment beyond AI. That said, the energy shock has triggered global inflation. We're looking for global headline inflation to rise, notably almost to 3% in 2026 before coming back off in 2027. But while oil and gas prices are pushing headline inflation higher, the pass through to core, depending on the economy, seems to remain mostly limited. By 2027, we look for those effects to fade and combined with somewhat slower growth this year, underlying inflation should soften again. As inflation risks have moved higher, though, central banks have generally become less accommodative. We expect the Fed to now stay on hold all the way through 2026 and then, if inflation really does come down, to be able to cut twice in the first half of 2027. We're looking for the ECB to hike twice this year as it grapples with this energy led inflation, but then reverse course next year in 2027. The bank of Japan, which had already been hiking policy, probably is set to continue that gradual hiking path. Looking forward to the second half of this year, though, global growth still does have a foundation and the US is a big part of that. AI investment and consumer spending are all what's driving the economy for now, but the energy outlook will determine how bumpy that path gets. Thanks for listening and if you enjoy this show, please leave us a review wherever you listen and share thoughts on the market with a friend or colleague today.

[B]

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