Episode summary
Growth Faces an Energy Test
Thoughts on the Market (Morgan Stanley)
· · Hosts: Seth Carpenter
Summary
Seth Carpenter says Morgan Stanley’s midyear outlook remains constructive on global growth, but the path is now being shaped by oil, AI and the consumer. He argues that the main macro question is whether the energy shock stays manageable or turns into a larger hit to inflation, central banks and recession risk.
The baseline view assumes crude returns to about $90 a barrel by the end of this year and then eases further in 2027, allowing the global economy to absorb the shock. Under that path, Morgan Stanley sees global real GDP growth at 3.2% in 2026 and 3.4% in 2027, after about 3.5% in 2025. If oil supply does not normalize, he warns the shock could become a recessionary volume shock, with oil potentially surging through $150 a barrel.
He says the US remains a key growth engine because of strong AI-related capital spending and consumer spending supported by the top end of the wealth distribution. He forecasts US real GDP growth at about 2.25% in 2026 and 2.5% in 2027. Inflation should rise in 2026 but mostly through headline effects, while the Fed stays on hold through 2026, the ECB hikes twice this year, and the Bank of Japan keeps tightening gradually.
Key takeaways
- Seth Carpenter says Morgan Stanley’s base case is that crude returns to about $90 a barrel by year-end, which would let the global economy absorb the energy shock.
- He forecasts global real GDP growth at 3.2% in 2026 and 3.4% in 2027, down from about 3.5% in 2025.
- He warns that if oil shipments do not normalize, the shock could turn into a recession scenario with oil prices possibly above $150 a barrel.
- He says the US remains a growth driver because AI capital spending and spending by higher-income consumers are still strong.
- He expects the Fed to stay on hold through 2026, while the ECB hikes twice this year and then reverses course in 2027.
Notable quotes
“Oil, AI, and the consumer now sit at the center of our global economic outlook”
“We have had and maintain a fundamentally constructive view on global growth. But the energy shock brings unusually high uncertainty”
“We forecast global real GDP growth at 3.2% in 2026 and 3.4% in 2027”
“Our base case assumes that crude returns to about $90 a barrel by the end of this year and declines further in 2027”
“AI capex sits at the center of this US outlook”
How the episode opens
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 midyear 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 prochemical inputs to manufacturing and other items. Higher prices slow activity shortages can stop it. Exposure to the energy shock differs sharply across regions.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- ai investment
- energy shocks
- mid-year outlook
- us consumers
- macro strategy
Watch the episode
Watch “Growth Faces an Energy Test” on YouTube
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