The Global Economy in 2026: A Year of Surprises and Strategic Shifts?
Serena Tang: Welcome to Thoughts on the Market. I’m Serena Tang, Chief Global Cross-Asset Strategist at Morgan Stanley. Joining me today is Seth Carpenter, our Global Chief Economist. Over the next two days, we’ll dive into Morgan Stanley’s 2026 outlook. Today, we’re tackling the macroeconomic landscape, and tomorrow, we’ll explore investment strategies across asset classes and markets.
It’s Monday, November 17th, 10 a.m. in New York. Seth, 2025 has been a year of transition. Global growth slowed under the weight of tariffs and policy uncertainty, yet consumer spending and AI-driven investments kept recession fears at bay. Your team has just released its 2026 economic outlook. What’s your take on global growth for the year ahead?
Seth Carpenter: Next year, we expect the global economy to continue slowing, much like it did in 2025, settling into a more moderate growth rate. At the same time, inflation should keep drifting downward in most regions. But here’s where it gets controversial: this seemingly straightforward view masks significant regional disparities and uncertainties. For instance, the U.S. economy is likely to slow further in the near term, particularly in the fourth quarter of this year and early next year. However, once we work through the effects of tariffs and monetary policy, we anticipate a pickup in the second half of 2026.
China’s story is quite different. The country remains trapped in a deflationary spiral, pushing growth downward. We don’t see this changing next year, meaning China will likely miss its 5% growth target. In Europe, fiscal policies are creating a push-and-pull dynamic, and while the ECB believes it’s achieved its inflation goals, growth remains unremarkable—hovering just above 1%. Not terrible, but nothing to celebrate.
But here’s where it gets interesting: 2026 could be a year of surprises. The biggest drivers of global growth will likely come from the U.S., but the outcomes could swing in either direction. Strong spending data contrasts sharply with weak employment numbers—a tension that rarely lasts. If the labor market weakens further, the U.S. could face a mild recession, which would ripple globally. Conversely, if spending remains robust, particularly in AI-driven CapEx and high-income household consumption, we could see an upside surprise that boosts the global economy.
Serena Tang: Speaking of central banks, markets have been laser-focused on the Fed. What’s your outlook for 2026, and how do you see policy playing out in other regions?
Seth Carpenter: The Fed remains a central focus, and our view—aligned with evolving market expectations—is that the Fed has a few more rate cuts ahead. By mid-2026, we expect the policy rate to settle just above 3%, roughly where the committee considers neutral. Why? The slowing labor market, coupled with below-average job creation, will likely prompt the Fed to guard against further deterioration by easing policy.
The ECB faces a different challenge. President Lagarde believes the disinflationary process is over, but we disagree. Tepid growth in Europe suggests inflation will undershoot the 2% target, pushing the ECB to cut rates further, potentially to 1.5%.
Japan stands out as the only major central bank likely to hike rates, possibly as early as December. However, the path to inflation will be bumpy, keeping the Bank of Japan on hold for most of 2026 before resuming hikes in 2027.
And this is the part most people miss: AI is a game-changer, but its impact on growth and inflation depends on timing. In 2026, AI will primarily drive demand-side inflation through CapEx spending on data centers and semiconductors. However, its supply-side benefits—increased productivity and disinflation—won’t fully materialize until later. We’ve factored in a modest productivity boost from AI for 2026, but the real impact will take years to unfold.
Serena Tang: Let’s put this into numbers. What does this mean for growth?
Seth Carpenter: Globally, we’re looking at around 3% GDP growth, with the U.S. at about 1.75%. These figures mask a weaker first half of the year, followed by a pickup in the second half. Compared to our midyear outlook, this is a notable upgrade, thanks to stronger-than-expected spending and the Fed’s willingness to ease rates sooner.
Here’s a thought-provoking question: As AI continues to reshape the economy, how will central banks balance inflationary pressures from demand-side spending with the long-term disinflationary benefits of productivity gains? Will 2026 be the year we see the first signs of this delicate equilibrium, or are we in for more surprises? Let us know what you think in the comments.
Serena Tang: Thanks, Seth. And thank you for listening. Tune in tomorrow for the second half of our conversation, where we’ll dive into investment strategies for the year ahead. If you enjoyed this episode, leave us a review and share it with a friend or colleague.
