Special Encore: 2026 Global Outlook – Slower Growth and Inflation

Podcast: Thoughts on the Market
Host: Morgan Stanley
Date: December 24, 2025

Episode Overview

This special encore episode revisits Morgan Stanley's 2026 Global Economic Outlook. Chief Global Cross Asset Strategist Serena Tang and Global Chief Economist Seth Carpenter dissect expectations for slower but stabilizing global growth, the persistence—and eventual easing—of inflation, and the dominant economic role of the US. They also discuss how the AI-driven investment boom and central bank policy paths are reshaping market and economic trajectories into the coming year.

Key Discussion Points and Insights

1. 2025 Economic Recap & 2026 Outlook

• Recap of 2025:

  • Growth slowed markedly amid tariffs and policy uncertainty.
  • Unemployment remained higher than predicted, yet financial markets were resilient, aided by an AI-driven capital expenditure boom.
  • “The real surprise was the disconnect between the economy and financial markets.” – [A, 00:00]

• 2026 Acceleration:

  • Modest acceleration in global growth predicted, especially in the US.
  • “Global growth should accelerate modestly, inflation should ease in the second half of the year, and real incomes look poised to improve.” – [A, 00:36]

2. Regional Growth Dynamics

• United States:

  • Further slowdown expected in early 2026, then a pickup as tariff impacts and monetary policy lag wear off.
  • Powered by strong consumer spending & sustained AI-led business investment.
  • “Most of the story is going to be driven in the U.S.” – [C, 04:36]

• China:

  • Continues to exhibit tepid growth, hampered by a deflationary spiral.
  • Not forecasted to meet its 5% growth target.

• Europe:

  • Growth predicted to be “a little bit over 1%,” with a notable pull between fiscal expansion and a central bank that believes its inflation-fighting job is done.

3. Risks and Drivers of Global Growth

• US strengths and vulnerabilities create global spillover risks—especially if labor market weakness is a leading indicator.

• Downside: “...the downside risk to the US economy and by extension the global economy really is a recession in the US now...it would be mild.” – [C, 03:50]

• Upside: Persistent robust household and business spending, especially in AI CapEx, may fuel stronger-than-expected performance.

• Other Regions: No expectations for large swings in Europe or China, though not ruled out.

4. Central Bank Policy Paths

• US (Federal Reserve):

  • Multiple rate cuts expected, with the policy rate falling to just over 3% by mid-2026—near the Fed's neutral rate.
  • “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%.” – [C, 04:53]

• Europe (ECB):

  • Despite President Lagarde’s view, data is expected to push policy rate lower by 0.5% to 1.5%, given subdued growth and inflation undershooting the 2% target.
  • “The ECB is probably going to cut again...down to about 1.5%.” – [C, 06:22]

• Japan (BOJ):

  • Bucking the trend, Japan’s central bank is hiking, with another increase likely in December.
  • Will likely hold through most of 2026, with further hikes likely delayed until 2027.

5. AI Investment Boom: Growth & Inflation Implications

• Near-Term (2026):

  • Demand side impacts of large AI capital investments are more influential than productivity gains.
  • “That’s demand in the economy…somewhat inflationary…kept the US economy buoyant and resilient this year.” – [C, 07:24]

• Medium-Term:

  • Productivity improvements from AI anticipated, but effect will build gradually over several years—not strongly disinflationary in 2026.
  • “Productivity should kick in…for 2026…not enough to really be super disinflationary. We think that builds over time, probably takes a couple years.” – [C, 08:06]

6. Numbers at a Glance

• Global GDP Growth: ~3% (Q4 over Q4)
• US GDP Growth: ~1.75%, with a weaker front half and stronger second half in 2026.
• Upgrades from mid-year forecasts based on persistent business and household spending, early Fed easing, and modest AI productivity gains.
• “For the US in particular, we’ve got about 1 and 3/4%...the number really kind of masks the evolution over time...only once we get into the second half of next year will things start to pick up.” – [C, 09:27]

Notable Quotes & Memorable Moments

• On Macro Surprises:
  • “I have to say next year may well be a year for surprises.” – Seth Carpenter [C, 01:41]
• On Recession Risks:
  • “If we did get that recession, it would be mild.” – Seth Carpenter [C, 03:49]
• On AI's Growth Role:
  • “For now AI is dominating the demand side of the economy. Over the next few years, it's going to be a real boost to the supply side.” – Seth Carpenter [C, 08:47]
• On US Resilience:
  • “Business spending, especially CapEx for AI, household spending, especially at the top end of the income distribution, where wealth is rising from stocks, where the liability side of the balance sheet is insulated with fixed rate mortgages, that spending could just stay strong and we might see this upside surprise…” – Seth Carpenter [C, 03:19]

Useful Timestamps for Key Segments

• 2025 Recap & 2026 Outlook – [00:00-01:44]
• Global Growth Projections – [01:13-02:59]
• Risks & Drivers of Growth – [03:00-04:38]
• Central Bank Policy Outlooks – [04:38-07:08]
• AI CapEx & Productivity – [07:08-09:10]
• US & Global GDP Numbers – [09:10-10:12]

Conclusion

This episode paints a portrait of a transitioning global landscape: continued, if modest, growth acceleration and a gradual return to lower inflation. The US is poised to lead, underpinned by strong consumer and business spending, especially focused on AI. Central bank policy divergence looms large, while AI investment will matter more for demand (and price pressures) than for near-term productivity leaps. Risks remain, chiefly tied to the US labor market, but both upside and downside scenarios seem unlikely to produce major shocks. Listeners are encouraged to tune in for part two, covering investment strategy for the coming year.