Our Global Chief Economist Seth Carpenter weighs the myriad
variables which could impact global markets in 2025, and why this
year may be the most uncertain for economies since the start of
the pandemic.
----- Transcript -----
Seth Carpenter: Welcome to Thoughts on the
Market. I'm Seth Carpenter, Morgan Stanley's Global Chief
Economist, and today I'll be talking about 2025 and what we might
expect in the global economy.
It's Tuesday, January 7th at 10am in New York.
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.
uncertainty is a key theme that we highlighted in our year ahead
outlook. The new U.S. administration, in particular, will choose
its own adventure with tariffs, immigration, and fiscal policy.
Some of the uncertainty is already visible in markets with the
repricing of the Fed at the December meeting and the
strengthening of the dollar. Our baseline has disinflation
stalling on the back of tariffs and immigration policy, while
growth moderates, but only late in the year as the policies are
gradually phased in.
But in reality, the sequencing, the magnitude and the timing of
these policies remains unknown for now, but they're going to have
big implications for the economies and central banks around the
world. The U.S. economy comes into the year on solid footing with
healthy payrolls and solid consumption spending.
Disinflation is continuing, and the inflation data for November
were in line with our forecast, but softer in terms of PCE than
what the Fed expected. While the Fed did lower their policy rate
25 basis points at the December meeting, Chair Powell's tone was
very cautious, and the Fed's projections had inflation risks
skewed to the upside.
The chair noted that the FOMC was only beginning to build in
assumptions about policy changes from the new administration.
Now, we have conviction that tariffs and immigration restriction
will both slow the economy and boost inflation -- but we've
assumed that these policies are phased in gradually over the
entirety of the year. And consequently -- that materially
Stagflationary impetus? Well, it's reserved for 2026, not this
year.
Similarly, we've assumed that effectively the entire year is
consumed by the process of tax cut extensions. And so, we've
penciled in no meaningful fiscal impetus for this year. And in
fact, with the bulk of the process simply extending current tax
policy, we have very little net fiscal impact, even in 2026.
Now, in China, the deflationary pressure is set to continue with
any policy reaction further complicated by U.S. policy
uncertainty. The policymaker meeting in late December that they
held provided only a modest upside surprise in terms of fiscal
stimulus, so we're going to have to wait for any further details
on that spending until March with the National People's Congress.
Meanwhile, during our holiday break, the renminbi broke above
7.3, and that level matches roughly the peaks that we saw in 2022
and 2023. The strong dollar is clearly weighing on the fixing.
The framework for policy will have to account for a potentially
trade relationship with the U.S. So, again, in China, there's a
great deal of uncertainty, a lot of it driven by policy.
The euro area is arguably less exposed to U.S. trade risks than
China. A weaker euro may help stabilize inflation that's trending
lower there, but our growth forecasts suggest a tepid outlook.
Private consumption spending should moderate, and maybe firm a
bit, as inflation continues to fall, and continued policy easing
from the ECB should support CapEx spending.
Fiscal consolidation, though, is a key risk to growth, especially
in France and Italy, and any postponement in investment from
potential trade tensions could further weaken growth.
Now, in Japan, the key debate is whether the Bank of Japan will
raise rates in January or March. After the last Bank of Japan
meeting, Governor Ueda indicated a desire for greater confidence
on the inflation outlook.
Nonetheless, we've retained our call that the hike will be in
January because we believe the Bank of Japan's regional Branch
manager meeting will give sufficient insight about a strong wage
trend. And in combination with the currency weakness that we've
been watching, we think that's gonna be enough for the BOJ to
hike this month. Alternatively, the BOJ might wait until the
Rengo negotiation results come out in March to decide if a hike
is appropriate. So far, the data remains supportive and Japanese
style core CPI inflation has gone to 2.7 per cent in November.
The market's going to focus on Deputy Governor Himino's speech on
January 14th for clues on the timing – January or March.
Finally, as the Central Bank of Mexico highlighted in their most
recent rate cut decision, caution is the word as we enter the new
year. As economists, we could not agree more. The year ahead is
the most uncertain since the start of the pandemic. Politics and
policy are inherently difficult to forecast. We fully expect to
revise our forecasts more -- and more often than usual.
Thanks for listening, and if you enjoy the show, please leave us
a review wherever you listen and share Thoughts on the Market
with a friend or colleague today.
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