Thoughts on the Market (Morgan Stanley)

Episode: Tackling Economic Hurdles in Europe and Asia
Date: September 30, 2025
Host: Seth Carpenter (A), Morgan Stanley's Global Chief Economist
Guests:

• Chetan Naya (C), Chief Asia Economist
• Jens Eisenschmidt (B), Chief Europe Economist

Overview

This episode, led by Seth Carpenter, dives deep into recent economic shifts and policy strategies across China, Japan, and Europe. The panel dissects how different regions are grappling with challenges like deflation, sluggish demand, and the effectiveness (and limitations) of fiscal and monetary policy. With the US Federal Reserve beginning to cut rates, the focus turns to mixed signals in Europe and renewed policy activism in Asia—providing an expert global economic roundtable.

Key Discussion Points & Insights

1. Setting the Global Scene — Uncertainty & Policy Transitions

[00:00–00:50]

• The global economic narrative remains “murky.”
• The US Fed has started cutting rates; the ECB is signaling the end of disinflation; China is stepping up policy support against deflation.
• “A lot has changed since the second quarter”—Seth Carpenter [00:00]
• The ensuing discussion is aimed at answering pressing investor questions about the global economic outlook.

2. China: Tackling Deflation through Anti Involution Policy

[00:50–04:37]
Chetan Naya explains the complexities behind China’s deflation dilemma and policy responses:

• What is “anti involution policy”?

  • “Involution refers to the dynamic where producers compete excessively, resulting in aggressive price cuts and diminishing returns on capital employed.” — Chetan Naya [01:38]
  • The anti involution policy is China's attempt to address excess manufacturing capacity and chronic deflation, triggered by over-investment after the property sector slowed.

• Policymakers' Strategies & Limitations:

  • Policy focus is moving toward cutting capacities in select overbuilt sectors rather than boosting demand.
  • “Supply reduction efforts may be helpful but will not be sufficient on their own.” — Chetan Naya [03:13]
  • Long-term, a shift to supporting consumption is needed—especially via social welfare for urban migrant workers and the rural poor—but large-scale implementation is unlikely.

• Economic Outlook:

  • “GDP growth to be around 4.7% [in 2025]… nominal GDP growth is going to be 4%.” — Chetan Naya [04:09]
  • Real growth is expected to slow in the second half as persistent deflation bites.

3. Japan: Reflation Progress but Policy Patience Prevails

[04:37–06:40]
Japan offers a contrast: breaking free of deflation, but policymakers remain cautious.

• Reflation Gains, But Risks Remain:

  • Japan has escaped its decades-long deflation. However, much of the recent rise in prices and wages is attributed to external factors (yen depreciation, hikes in energy and food prices).
  • “If you look at the drivers to rise in prices and wage growth… demand has not really played a big role.” — Chetan Naya [05:44]

• Why the Bank of Japan (BoJ) Stays on Hold:

  • The BoJ wants to see robust, demand-driven inflation before raising rates.
  • Domestic consumption remains fragile: real GDP is only 1% above pre-COVID levels, consumption is still 1% below.
  • “BoJ needs still some more time to be sure we are on that virtuous cycle of rising prices and wages.” — Chetan Naya [05:19]
  • Risks from trade policy (tariffs) warrant further caution.

4. Europe: Disinflation Endgame or Onward to Rate Cuts?

[06:40–11:52]
Jens Eisenschmidt discusses Europe’s inflation trajectory and fiscal dynamics:

• ECB’s Stance:

  • ECB President Lagarde declared that Europe’s disinflation process has ended; rates are “on hold.”
  • Jens counters that while inflation has indeed tumbled since its 10% peak, “we have actually inflation below target next year and the ECB agrees.” — Jens Eisenschmidt [08:03]
  • ECB forecasts for 2027 peg inflation at 1.9%, below the 2% goal, and “the discussion on further cuts will heat up.” — Jens [09:04]

• Policy Path Ahead:

  • No change is expected at the upcoming October meeting; December will be in focus, with possible new cuts foreseen in December and March.

• Key Factors—Germany & France:

  • Germany: Large stimulus on infrastructure/defense is coming, but the impact will be “just not enough” in the short term due to external headwinds (China slowdown, US tariffs).
    • “There is textbook fiscal stimulus… but just not enough.” — Jens Eisenschmidt [10:34]
  • France: Political instability and weakened parliamentary majority make fiscal consolidation unlikely; resulting in muddling-through and lackluster growth.
    • “A country that lacks a clear economic policy structure—a clear governance structure... muddling through a little bit.” — Jens [11:44]

Notable Quotes & Memorable Moments

• On China’s Anti-Involution Policy:

  • “Deflation is not good for the corporate sector, households and the government.” — Chetan Naya [02:23]

• On Japan’s Policy Caution:

  • “BoJ needs still some more time to be sure that we are on that virtuous cycle of rising prices and wages.” — Chetan Naya [05:19]

• On ECB’s Inflation View:

  • “The ECB itself is predicting that inflation from here will fall... So… it cannot be really distinguished here.” — Jens Eisenschmidt [08:49]

• On Fiscal Stimulus in Germany:

  • “There is textbook fiscal stimulus… but just not enough.” — Jens Eisenschmidt [10:34]

• On France’s Fragmented Fiscal Future:

  • “This is probably a good description of the approach here in France and we actually have, on the lack of a clear economic policy agenda and still some fiscal consolidation, we have actually lackluster growth in France for this year and next.” — Jens Eisenschmidt [11:44]

Timeline of Key Segments

| Timestamp | Segment | |-----------|---------| | 00:00–00:50 | Episode introduction, global context | | 00:50–04:37 | China: Anti involution policy, deflation, outlook | | 04:37–06:40 | Japan: Reflation and Bank of Japan stance | | 06:40–09:19 | Europe: ECB's stance on disinflation and inflation outlook | | 09:19–11:52 | Fiscal outlook in Germany & France; growth implications |

Tone & Takeaway

This episode reflects Morgan Stanley’s signature blend of data-driven analysis and candid expert discussion. The tone is pragmatic, occasionally skeptical—especially about policymakers’ ability to deliver decisive economic turnarounds. Whether it’s China's bid to beat deflation, Japan’s measured approach to policy normalization, or Europe’s uneasy equilibrium between fiscal stimulus and consolidation, the consensus is one of persistent challenges and muted optimism.

For listeners seeking an informed, nuanced take on global macroeconomic dynamics, this episode delivers actionable insights and sober perspectives grounded in recent data and policy developments.