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 10 a.m. 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.
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.
And 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 U.S. 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.
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