Morgan Stanley Mid-Year Outlook: Tariff Impact on Global Economy, Expecting Greater Slowdown in the U.S. Economy
Morgan Stanley released its mid-year outlook, pointing out that the U.S. tariff increases pose a significant shock to the global economy, predicting that global economic growth will decline by 1% from 2024 to 2025. The slowdown in the U.S. economy will be more pronounced, with growth rates dropping from 2.5% to 1%. Even if the tariff policy is revoked, an economic slowdown will still be difficult to avoid. Morgan Stanley predicts that the Federal Reserve will maintain interest rates unchanged throughout 2025, only lowering them when inflation recedes in early 2026
According to the Zhitong Finance APP, Morgan Stanley's research department recently released a mid-year outlook mentioning that the U.S. tariff increases are a significant shock event to the global economic outlook. The institution predicts that from 2024 to 2025, global economic growth will decline by a full percentage point, while the slowdown in the U.S. economy will be even greater, dropping from a year-on-year growth rate of 2.5% in the fourth quarter of last year to 1% this year. The risks facing the global economy may be asymmetric. Even if tensions ease or tariff policies are fully revoked, an economic slowdown will still be difficult to avoid, with limited upward potential for the economy. If the situation escalates again, it could easily trigger a recession in the U.S. and even the global economy.
Morgan Stanley mentioned that recent discussions with industry insiders revealed that they feel relieved as uncertainties gradually dissipate. However, it is important to emphasize that tariffs still exist and are far higher than at the beginning of this year. Last week, the U.S. announced significant tariff increases on Europe, indicating that the risk of high tariffs has not been eliminated. More importantly, the drag effect of current tariff policies on economic growth has not yet fully manifested in the real data.
The transmission paths of tariff shocks to global economies show significant differences. As the main entity imposing tariffs, the U.S., with a broad range of taxation, will face dual pressures of slowing real GDP growth and rising inflation. The impact of U.S. tariff increases and economic slowdown on other economies will mainly manifest as weak total demand, leading to slower economic growth and declining inflation rates. Specifically:
Eurozone: During the forecast period, the annualized economic growth rate for each year is unlikely to exceed 1%, with inflation consistently below the European Central Bank's target of 2%.
Japan: Exports are slowing, but with domestic consumption remaining resilient, nominal GDP will remain stable.
India: Among the countries of concern, India performs the best, with the year-on-year growth rate expected to approach 6% in the fourth quarter of this year, and growth is expected to accelerate thereafter.
Monetary policy reflects the development of the macro situation. Morgan Stanley expects the U.S. core personal consumption expenditure (PCE) inflation rate to accelerate again in the second half of the year. Based on this judgment, Morgan Stanley believes that the Federal Reserve will maintain interest rates unchanged throughout 2025, only beginning to cut rates when inflation falls in early 2026.
In other words, at the beginning of next year, the focus will shift from inflation issues to economic growth slowdown and employment risks for the Federal Reserve. In stark contrast, due to the expected continuation of the disinflation trend, the European Central Bank can lower interest rates below neutral levels this year, giving it greater policy space to respond to the impacts of economic weakness and a stronger euro. The Bank of Japan was previously in a rate-hiking cycle, but Morgan Stanley believes its rate hike actions are nearing an end.
Regarding the loss of the safe-haven status of U.S. dollar assets, Morgan Stanley believes that at least for now, the answer is negative. Although global clients are reassessing asset allocations, there is no solid evidence of foreign investors withdrawing from U.S. assets. The era of U.S. assets significantly outperforming the market may be coming to an end, but in the foreseeable future, it will be difficult to find alternatives for assets that occupy such a large proportion of global investment portfolios. However, it should be noted that the recent downgrade of U.S. Treasury ratings has also reminded the market that the situation is still evolving, and the fair value assessment of assets needs to be dynamically adjusted over time
