Morgan Stanley(US:MS)2025-05-21 06:36Investment Rating - The report indicates a baseline forecast of global growth slowing from 3.5% in 2024 to 2.5% in 2025, with specific growth rates for major economies outlined [7][8][70]. Core Insights - The broad imposition of tariffs by the US is identified as a structural shock to global trade, significantly impacting growth across various economies [5][6]. - The report highlights that the trade shock affects economies simultaneously, pushing them below potential growth levels, with the US experiencing a notable decline in real GDP growth from 2.5% in 2024 to 1.0% in both 2025 and 2026 [7][74]. - China is projected to see a slowdown in real growth by approximately 0.5 percentage points in 2025 compared to 2024, with persistent deflation expected [7][17]. - India is noted as the fastest-growing economy in the coverage, with real GDP growth forecasted at 5.9% in 2025 and 6.4% in 2026 [7][68]. Summary by Sections Growth – A Widespread Deceleration - Global growth is forecasted to decelerate significantly, with the US, Euro area, and China all experiencing reduced growth rates due to trade shocks and other economic factors [7][70]. - The report anticipates that the US will face a step down in real GDP growth, while the Euro area will not exceed 1% growth throughout the forecast period [7][8]. Inflation Divergence - The report discusses a divergence in inflation trends, with the US experiencing a temporary boost in inflation due to tariffs, while other regions like the Euro area and Japan see inflation moderating [16][17]. - Core PCE inflation in the US is expected to peak at 4.5% before declining, remaining above the Federal Reserve's target throughout 2026 [16][17]. Monetary Policy – The Fed in a Bind - Central banks are expected to react to slower growth and softer inflation, with the Federal Reserve likely to maintain its policy stance until inflation peaks [18][19]. - The report forecasts that the Fed will restart its easing cycle in March 2026, while the ECB is expected to continue its easing cycle, bringing the policy rate below neutral [18][19]. Global Trade – A New Paradigm - The report emphasizes that the trade shock is a significant factor affecting global economic performance, with uncertainty in trade policy leading to reduced capital expenditure decisions globally [6][74]. - The impact of tariffs is expected to create a level shift in prices, affecting consumption patterns and overall economic growth [61][62].