Episode summary
How Consumers, CapEx and Fiscal Policy Are Driving Growth
Thoughts on the Market (Morgan Stanley)
· · Hosts: Seth Carpenter
Summary
The discussion centered on the real economy drivers behind growth in the US, Europe, and Asia. In the US, the guest said consumer spending remains highly dependent on upper-income households, which support about 40% or more of total spending, and argued that easing inflation and fading tariff effects could let lower- and middle-income households contribute more in 2026. He also said 2025 capex was dominated by AI, but that broader business investment would likely need a wider consumer recovery, stronger labor income, and maybe lower mortgage rates.
For Europe, the panelist described growth as uneven rather than simply weak, with Germany set to benefit from fiscal stimulus over time, while France and Italy stay below potential and Spain remains strong but small. He said German fiscal space is exceptional, but implementation lags and trade exposure could delay the payoff. For Asia, the guest said China’s macro backdrop stays challenging because deflation persists in 2026, even as exports and advanced manufacturing remain micro positives. He argued the PBC is unlikely to allow significant RMB appreciation while deflation remains, and that faster currency gains could make rebalancing harder, not easier.
On the outlook for the rest of Asia, the panelist expected non-tech exports to recover in 2026, broadening growth beyond tech. In rapid-fire questions, the guests said rapid AI adoption could lift productivity toward 3%, while extra US tariffs on Europe could shave 30 to 60 basis points from GDP growth.
Key takeaways
- The guest said upper-income consumers drive about 40% or more of US spending, making the expansion vulnerable to a narrow K-shaped pattern.
- The guest argued 2025 capex was “almost exclusive” to AI, and broader investment needs stronger demand and lower mortgage rates to broaden out.
- The panelist said German fiscal stimulus is a genuine medium-term positive, but implementation lags mean markets should not expect an immediate boost.
- The guest said China will likely stay in deflation in 2026, limiting room for the PBC to allow significant RMB appreciation.
- The panelist expected non-tech exports to improve across Asia in 2026, supporting a broader regional recovery.
- The guest said if AI rapidly boosts productivity, the Fed could still cut rates because inflation would likely keep falling.
Notable quotes
“the upper income consumer drives about 40% or more of total spending”
“the primary almost exclusive story in 2025 for business spending was AI”
“we think the German economy has most potential to catch up and actually accelerate and that's due to fiscal stimulus mainly”
“the macro backdrop for China we think will still be challenging in 2026”
“we don't think PBC will allow a significant currency appreciation”
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. And yesterday I sat down with my colleagues, Michael Gapen, our chief US economist, Ched Naya, our chief Asia economist, and Yen Eisen Schmidt, our chief Europe economist.
And we spent a lot of time talking about monetary policy around the world. Today, let's go back to them, talk about the real side of the economy. It's Friday, January 23rd at 10 a.m.
in New York
And 400 p.m. in Frankfurt — And 9:00 p.m. in Hong Kong.
Michael, let me start with you back on the US. And when I think about the US economy, we have to start by talking about the US consumer. Walk us through what investors need to understand about consumer spending in the US.
What's driving it? What's going to hold it up? And where are the risks?
I think the primary thing to remember here is that the upper income consumer drives about 40% or more of total spending. So there can be higher inflation that eats into real labor market income growth. There can be inflation dispersion which hits lower inome households more than upper inome households.
We can have tariffs that get applied to goods and lower and middle inome households buy goods more than upper inome households. But when asset markets continue to appreciate, when home prices hold on to their prior gains, sometimes that doesn't matter in the aggregate statistics because that upper income household keeps spending. I do think that's a lot of what happened in in 2025.
So there is a K-shaped economy. I think one of the main risks about the US is that its expansion is narrowly driven. We think that will broaden out in 2026.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- consumer spending
- capex
- fiscal policy
- economic growth
- regional growth
Companies and tickers mentioned
- MS
- Morgan Stanley
Watch the episode
Watch “How Consumers, CapEx and Fiscal Policy Are Driving Growth” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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