Thoughts on the Market: What Could Shape the Global Economy in 2025
Hosted by Morgan Stanley | Release Date: January 7, 2025
In the latest episode of Morgan Stanley's "Thoughts on the Market," Seth Carpenter, the firm's Global Chief Economist, delves into the potential factors that could influence the global economy in 2025. Released on January 7, 2025, this episode offers a comprehensive analysis of economic trends, policy uncertainties, and regional developments. Below is a detailed summary capturing the key discussions, insights, and conclusions from the episode.
1. Introduction to 2025 Economic Outlook
Seth Carpenter sets the stage by highlighting the unprecedented uncertainty surrounding the 2025 economic landscape. He likens the upcoming year’s outlook to a "choose your own adventure book," emphasizing the multitude of policy decisions yet to be made.
“Normally, our Year Ahead outlook is a roadmap for markets, but for 2025 it feels a bit more like a choose your own adventure book.”
[00:30]
2. Policy Uncertainty and the New US Administration
A central theme of the discussion is the policy uncertainty introduced by the new US Administration. Key areas of focus include tariffs, immigration, and fiscal policy, all of which are poised to significantly impact both the domestic and global economies.
“The new US Administration in particular will choose its own adventure with tariffs, immigration and fiscal policy.”
[00:45]
Carpenter notes that the unpredictability in policy decisions is already influencing market behaviors, such as the strengthening of the US dollar and the Fed's recent rate adjustments.
3. US Economic Health and Inflation Trends
Despite the uncertainties, the US economy enters 2025 on a solid footing. Carpenter highlights robust payroll numbers and strong consumer spending as indicators of economic resilience. However, inflation dynamics present a more nuanced picture.
“The US Economy comes into the year on solid footing with healthy payrolls and solid consumption spending.”
[01:20]
Inflation continues to trend downward, aligning with Carpenter's forecasts, though the Personal Consumption Expenditures (PCE) inflation is softer than anticipated by the Federal Reserve.
“The inflation data for November were in line with our forecast, but softer in terms of PCE than what the Fed expected.”
[01:45]
4. Federal Reserve's Monetary Policy
The Federal Reserve's actions remain a critical variable. In December, the Fed lowered its policy rate by 25 basis points, reflecting a cautious stance. Chair Powell conveyed a wary outlook, with projections indicating inflation risks tilted to the upside.
“Chair Powell's tone was very cautious, and the Fed's projections had inflation risks skewed to the upside.”
[02:10]
Carpenter explains that the Fed is starting to incorporate potential policy changes from the incoming administration into its models, anticipating that tariffs and immigration restrictions will eventually slow economic growth and elevate inflation.
5. Fiscal Policy and Tax Cut Extensions
Fiscal policy remains subdued, with the primary focus being on extending current tax policies rather than implementing new measures. Carpenter indicates that the year's fiscal agenda is largely consumed by tax cut extensions, resulting in minimal net fiscal impact.
“We've assumed that effectively the entire year is consumed by the process of tax cut extensions.”
[03:15]
This conservative fiscal approach suggests limited fiscal stimulus, with significant fiscal tightening reserved for 2026.
6. Global Perspectives
a. China: Deflationary Pressures and Policy Challenges
China faces continued deflationary pressures exacerbated by US policy uncertainties. Recent fiscal stimulus has been modest, and further details are expected with the National People's Congress in March. The strengthening renminbi, surpassing the 7.3 mark during the holiday season, mirrors previous peaks from 2022 and 2023, challenging the policy framework amid a strong US dollar.
“In China, there's a great deal of uncertainty, a lot of it driven by policy.”
[03:55]
b. Euro Area: Stabilizing Inflation and Growth Concerns
The Eurozone is relatively insulated from direct US trade risks compared to China. A weaker euro may aid in stabilizing declining inflation rates. However, growth prospects remain tepid, with private consumption expected to moderate. The European Central Bank's continued policy easing could support capital expenditures, though fiscal consolidation poses a significant growth risk, particularly in France and Italy.
“A weaker euro may help stabilize inflation that's trending lower there, but our growth forecasts suggest a tepid outlook.”
[04:10]
c. Japan: Central Bank Decisions and Inflation Outlook
Japan stands at a crossroads regarding its monetary policy. The Bank of Japan (BOJ) faces a decision on whether to hike rates in January or defer until March, contingent on inflation outlooks and wage trends. Carpenter maintains a January rate hike expectation, citing favorable wage growth and currency weakness as drivers.
“We think that's going to be enough for the BOJ to hike this month.”
[04:40]
Japanese core CPI inflation reached 2.7% in November, heightening expectations for policy adjustments.
d. Mexico: Cautious Monetary Policy
The Central Bank of Mexico has adopted a cautious approach, as evidenced by its recent rate cut decision. This caution reflects broader uncertainties as economies navigate the new year.
“…caution is the word as we enter the New Year.”
[04:50]
7. Overall Economic Uncertainty and Forecast Revisions
Carpenter underscores that 2025 may be the most uncertain year since the onset of the COVID-19 pandemic. Political and policy unpredictability necessitates frequent revisions of economic forecasts to adapt to evolving conditions.
“The year ahead is the most uncertain since the start of the pandemic.”
[04:55]
8. Conclusion
Seth Carpenter concludes by acknowledging the inherent difficulties in forecasting amidst volatile political and economic landscapes. Morgan Stanley anticipates ongoing adjustments to their economic projections as new information emerges.
“We fully expect to revise our forecasts more and more often than usual.”
[04:55]
This episode provides a thorough examination of the multifaceted factors poised to shape the global economy in 2025. From US policy directions and inflation trends to regional economic challenges in China, the Eurozone, Japan, and Mexico, Carpenter offers valuable insights into the complexities of the upcoming year. Listeners are encouraged to stay informed and adaptable as market conditions continue to evolve.