Tariff Roundtable: Global Economy on the Brink of Recession?

Summary

Podcast Summary: Tariff Roundtable - Global Economy on the Brink of Recession?

Podcast Information:

• Title: Thoughts on the Market
• Host/Author: Morgan Stanley
• Episode: Tariff Roundtable: Global Economy on the Brink of Recession?
• Release Date: April 7, 2025

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Introduction

In the April 7, 2025 episode of Thoughts on the Market, hosted by Morgan Stanley's global chief economist Seth Carpenter, a panel of esteemed economists delves into the escalating concerns surrounding recent tariff implementations and their profound impact on the global economy. The discussion centers on whether the global economy is teetering on the edge of a recession, examining perspectives from the United States, Europe, and Asia.

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Top Concerns Among Investors

Seth Carpenter opens the discussion by identifying tariffs as the foremost concern among investors worldwide. Each panelist—Mike Gapen (Chief US Economist), Chetan Aya (Chief Asia Economist), and Jens Eisenschmidt (Chief Europe Economist)—echoes this sentiment, highlighting tariffs as the predominant issue impacting investor sentiment.

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Pre-Tariff Economic Outlooks

Before the latest round of tariffs, each region had its own economic forecasts:

• China’s Outlook (Chetan Aya):

  • Anticipated a 15 percentage point increase in tariffs on imports from China.
  • Faced domestic challenges including high debt levels, excess production capacity, and deflation.
  • Predicted a slowdown in China's growth from 5.4% to approximately 4% on a quarterly basis.

• Europe’s Outlook (Jens Eisenschmidt):

  • Expected a slight recovery with growth not exceeding 1%.
  • Influenced by rising real wages and existing tariffs on steel, aluminum, and cars.
  • German fiscal expansion was projected to sustain positive growth rates into 2026.

• United States’ Outlook (Mike Gapen):

  • Anticipated effective tariff rates rising to 35-40% on China, with additional tariffs on steel, aluminum, and autos bringing the overall effective rate to 8-9%.
  • Forecasted economic growth at 1.5% for the current year and 1% for the next year.
  • Expected core PCE inflation to stabilize around 2.8%, allowing for a gradual economic slowdown.

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Impact of the New Tariff Announcements

The panelists express that the magnitude of the recent tariff announcements exceeded expectations, leading to a more pessimistic economic outlook:

• Increased Tariff Rates (Mike Gapen at [03:10]):

  • Effective tariff rates surged from the anticipated 8-9% to as high as 22%.
  • Gapen remarked, "At least a century," highlighting the unprecedented nature of these tariffs.

• Economic Implications (Mike Gapen at [03:18]):

  • Projected a potential full percentage point reduction in US growth, potentially pushing the economy closer to a recession.
  • Anticipated core PCE inflation could rise to the high threes or low fours, intensifying inflationary pressures.
  • Discussed the risk of negative wealth effects and a possible asset market meltdown, further dampening business confidence and consumer spending.

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Regional Economic Outlooks Amid Tariffs

• Europe’s Potential Recession (Jens Eisenschmidt at [05:09]):

  • Estimated the European economy could face a 60 to 120 basis points reduction in growth, potentially nudging the Eurozone towards recessionary territory.
  • Addressed the likelihood of retaliatory tariffs from the European Union, emphasizing that Europe's response would consider diplomatic and security alliances with the US.
  • Suggested that retaliation might focus on services regulation rather than traditional tariffs, mitigating immediate inflationary and growth impacts.

• China’s Economic Growth Downside (Chetan Aya at [07:17]):

  • Highlighted that China's reciprocal tariffs exacerbate economic challenges.
  • Revised China's growth outlook downward by an additional 50 to 100 basis points, contingent on the strength of policy stimulus measures.

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Central Bank Responses and Challenges

• Federal Reserve’s Dilemma (Mike Gapen at [07:55]):

  • The Fed is caught between rising inflation and the looming threat of economic slowdown.
  • Jerome Powell indicated a reluctance to cut interest rates preemptively, maintaining a cautious stance until clearer economic signals emerge.
  • Gapen noted, "If there's no recession, it likely means the Fed's on hold for a very long time."

• European Central Bank’s Position (Jens Eisenschmidt at [08:49]):

  • The ECB is approaching a neutral stance, with inflation potentially falling below target by mid-year.
  • Emphasized the risk of a quicker rate-cutting cycle should economic growth continue to falter.
  • Suggested that exchange rate depreciation typically associated with tariffs is mitigated by the current Euro appreciation.

• Bank of Japan’s Predicament (Chetan Aya at [10:22]):

  • The Bank of Japan faces challenges amid reciprocal US tariffs, risking a pause on expected rate hikes.
  • Aya stated, "Unless US removes tariffs very quickly in the near term, we see the risk that BoJ will pause instead of hiking."

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Conclusion

Seth Carpenter wraps up the discussion by encapsulating the consensus: prior expectations accounted for some economic slowdowns due to tariffs, but the recent dramatic increase in tariff rates has sharply worsened the outlook. The global economy is edging toward recession, compelling central banks to navigate a precarious balance between managing inflation and mitigating economic decline. The episode underscores the interconnectedness of global economies and the profound implications of protectionist trade policies.

Notable Quotes:

• Mike Gapen [03:18]: "That's a lot. ... At least a century."
• Jens Eisenschmidt [05:09]: "This is going to be down from here for sure."
• Chetan Aya [07:17]: "It's very unlikely that a deal will be done anytime soon."
• Mike Gapen [07:55]: "It's going to be tough for us to look through this rise in inflation and preemptively ease."
• Chetan Aya [10:22]: "We see the risk that BoJ will pause instead of hiking."

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Final Thoughts

The episode "Tariff Roundtable: Global Economy on the Brink of Recession?" provides a comprehensive analysis of the escalating tariff tensions and their potentially recessionary consequences. With contributions from leading economists, the discussion offers valuable insights into the challenges facing major economies and central banks in navigating this turbulent economic landscape.

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This summary is intended for informational purposes only and reflects the content of the podcast episode as of its release date.

Transcript

[Seth Carpenter]

Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's global chief economist and today we're going to be talking about tariffs and what they mean for the global economy. It's Monday, April 7th at 10am in.

[Jens Eisenschmidt]

New York and it's 4pm in Frankfurt.

[Chetan Aya]

And it's 10pm in Hong Kong.

[Seth Carpenter]

And so I'm here with our global economists from around the world. Mike Gapen, chief US Economist Chetan Aya, our chief Asia economist and Jens Eisenschmidt, our chief Europe economist. So let's jump into it. Let me go around first and ask each of you what is the top question that you are getting from investors around the world? Chetin?

[Chetan Aya]

Tariffs.

[Seth Carpenter]

Yens? Tariffs, Mike?

[Mike Gapen]

Tariffs.

[Seth Carpenter]

All right, well that seems clear. Before we get into the likely effects of the tariffs, maybe each of you could just sketch for me where you were before tariffs were announced. Chetan, let me start with you. What was your outlook for the Chinese economy before the latest round of tariff announcements?

[Chetan Aya]

Well, Seth, working with our US public policy team, we were already assuming a 15 percentage point increase on tariffs on imports from China. And China also was going through some domestic challenges in terms of high levels of debt, excess capacities and deflation. And so combining both the factors, we were assuming China's growth will slow on Q4 by Q4 basis last year from 5.4% to close to 4% this year.

[Seth Carpenter]

Jens, what about Europe? Before these broad based tariffs, how were you thinking about the European economy?

[Jens Eisenschmidt]

We had pencilled in a slight recovery, not really getting us much beyond 1% backdrop here. Still rising real wages. We had some tariffs in here on steel, aluminium and cars. Much akin, a bit more of a beefed up version if you want of the 18 tariffs but not much more than that. And then of course we had the German fiscal expansion that helped our outlook to sustain this positive growth rates into 2026.

[Seth Carpenter]

Mike, for you, you also had thought that there were going to be some tariffs at some point before this last round of tariffs. Maybe you can tell us what you had in mind before last week's announcements.

[Mike Gapen]

Yeah Seth, we had a lot of tariffs on China, the effective rate rising to say 35 to 40%. But as Jens just mentioned, outside of that we had some on steel and aluminum and autos with Europe but not much beyond that. So an effective tariff rate for the US that reached maybe 8 to 9%. We thought that would gradually weigh on the economy. We had growth at around 1.5% this year and 1% next year. And the disinflation process Stopping, meaning inflation finishes the year at around 2.8 core PCE, roughly where it is now. So a gradual slowdown from tariff implementation.

[Seth Carpenter]

All right, so a little bit built in. You knew there was going to be something, but boy, I guess I have to say, judging from markets reactions, the world was surprised at the magnitude of things. What's changed in your mind? It seems like tariffs have got to push down the outlook for growth and up the outlook for inflation. Is that about right? Can you sketch for us how this new news is going to affect the outlook?

[Mike Gapen]

Sure. Instead of effective tariff rates of 8 to 9%, we're looking at effective tariff rates maybe as high as 22%.

[Seth Carpenter]

That's a lot.

[Mike Gapen]

Yeah, more than twice what we were expecting. Obviously some of that may get negotiated down.

[Seth Carpenter]

And would you say that's the highest tariff rate we've seen in a while?

[Mike Gapen]

At least a century. Okay, so in terms of what it would imply for the outlook, if we were at a percent and a half on growth before, it's pretty easy to revise that down, maybe even a full percentage point. Right. So it's a tax on consumption and a tariff rate that high is going to pull down consumer spending. It's also going to lead to even much higher inflation than we were expecting. So rather than 2.8 for core PCE year on year, I wouldn't be surprised if we get something even in the high threes or perhaps even low fours. So it pushes the economy, we would say, at least closer to a recession. If not, you're getting closer to the proverbial coin toss because there are the potential for a lot of indirect effects on business confidence. Do they spend less and hire less? And obviously we're seeing asset markets meltdown. I think it's fair to describe it that way. You could have negative wealth effects on the upper income consumers. The direct effects get you very modest growth, a little bit above zero. It's the indirect effects that we're worried about.

[Seth Carpenter]

Wow, that's quite a statement. A substantial slowdown for the US flirting with no growth and then given all the uncertainty, the possibility that the US actually goes into recession, a real possibility there. That feels like a big call. Jens, if the US could be on the verge of recession with uncertainty and all of that, what are you thinking about Europe now? You had talked about Europe before, the tariffs growing around 1%. That's not that far away from zero. So what are you thinking about the outlook for Europe once we layer in these additional tariffs? And I guess every bit is important. Do you See retaliatory tariffs coming from the European Union?

[Jens Eisenschmidt]

No, I think there are at least three parts here. I totally agree with that framing. So first of all, we have the tariffs and, and then we have some estimates what they might mean, which just suppose what we have heard last week. Stakes would get us already in some countries into recessionary territory and for the aggregate euro area, not that far from it. So we think effects could range between 60 and 120 basis points of less growth. Now that to some extent incorporates retaliation. And so the question is how much retaliation we might expect here. This is a key question we get from clients. I'd say we get something that's. That seems sure. At the same time, it seems that Europe weighs a response that is taking into account all the constraints that are in the equation. After all, the US is an ally also in security concerns. You don't want to necessarily endanger that good relationship. So that will for sure play a role. And then the US has a services surplus with Europe. So it's also likely to be a response in the space of services regulation, which is not necessarily inflationary on the European side and not necessarily growth impacting so much. But you know, be it as it may, this is going to be down from here for sure. And then the other thing just mentioned by Michael, I mean, there is clearly a read across from a slower US growth environment that will also not help growth in the euro area. So all being told, it could very well mean, if we get the US close to recession, that the euro area is flirting with recession too.

[Seth Carpenter]

Got it.

[Chetan Aya]

Seth, can I, can I interrupt you on this one? I just wanted to add the perspective on retaliatory tariffs from China. What we had actually originally built was that China would take up a retaliatory response which would be less than proportionate, just like the last time. But considering that China has actually mashed US reciprocal tariffs, it makes us feel that it's very unlikely that a deal will be done anytime soon.

[Seth Carpenter]

Okay, so then how would you revise your view for what's going on with China?

[Chetan Aya]

Yeah, so as I mentioned earlier, we had already built in some downside, but with these reciprocal tariffs, we see another 50 to 100bps downside to China's growth depending upon how strong is the policy stimulus.

[Seth Carpenter]

At some point, I suspect we're going to start having a discussion about what it really means to have a global recession. Markets are going to start to look to central banks. Mike, let me turn to you. Jay Powell spoke recently. He repeated that he is in no Hurry to cut interest rates. Can you talk to me about the challenges that the Fed is facing right now?

[Mike Gapen]

The Fed is faced with this problem where tariffs mean it's missing on both sides of its mandate, where inflation is rising and there's downside risk to the economy. So how do you respond? Really, what Powell said is it's going to be tough for us to look through this rise in inflation and preemptively ease. So for the moment, they're on hold and they're just going to evaluate how the economy responds. If there's no recession, it likely means the Fed's on hold for a very long time. If we get negative job growth, if you will, or job cuts, then the Fed may be moving to ease policy. But right now, Powell doesn't know which one of those is going to materialize first.

[Seth Carpenter]

All right, Mike, so I understand what you're saying. Inflation going higher, growth going lower. Really awkward position for the Fed. And I think central banks around the world really have to weigh the two sides of these sorts of things. Which one is going to dominate? Exactly.

[Jens Eisenschmidt]

Set. May I jump in here? Because I think that's a perfect segue to the ecb, which I was thinking a lot about that just recently coming back from the US how different the position really is here. So the ECB currently is on the way to neutral, at least this we have always thought as a good way of framing their way. Inflation is falling to target. Now with all the risks that we have mentioned, there's a clear risk. We see inflation going below 2% already by mid this year. If oil prices were to stay as low as they are and with the euro appreciation that we have seen, the tariff scare in terms of the inflationary impact from tariffs, that's much less clear now whether that's really something to worry about, simply because what you typically see with these tariffs is actually a depreciation of the exchange rate, which we haven't seen. So we think there is a clear risk, downside risk to our path, at least that we have an anticipation, a quicker rate cutting cycle by the ecb. And potentially if the growth outlook that we have just outlined, all these risks really materializes or threatens, is more likely to materialize, then the cuts could also be deeper.

[Seth Carpenter]

That's super tricky as well, though, because they're going to have to deal with all the same uncertainty. I will say this brings up to me the bank of Japan because it was the one major central bank that was going the opposite direction before all of this. They were hiking while the other central banks were cutting Chet, let me turn to you. Do you think the bank of Japan is going to be able to follow through on the additional rate hike that you all had already had in your forecast?

[Chetan Aya]

Yes, I think bank of Japan will have a difficult time. Japan is exposed to direct effect of 24% reciprocal tariffs. It will see downside from global trade slowdown, which will weigh on its exports and yen appreciation will weigh on its inflation outlook. Hence, unless if US removes tariffs very quickly in the near term, we see the risk that BoJ will pause instead of hiking, as we had assumed in our earlier base case.

[Seth Carpenter]

Well, this is a good place to stop. Let me see if I can summarize the conversations we've had so far. Before this latest round of tariffs had been announced, we had thought there'd be some tariffs and we had looked for a bit of slowdown in the US and in Europe and in China, the three major economies in the world. But these new round of tariffs have added a lot to that slowdown, pushing the global economy right up to the edge of recession. And what that means as well is for central banks, they're left in at least something of a bind. The bank of Japan, though, the one major central bank that had been hiking. Boy, there's a really good chance that that rate hike gets derailed. Well, thank you for listening, and if you enjoy the show, please leave us. A Review wherever you listen and share thoughts on the market with a friend or a colleague today. The preceding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives, and may not be suitable for.