Morgan Stanley forecasts global GDP growth of 3.2% in 2026, with the Fed on hold all year, as an energy shock tests a broadly constructive outlook anchored by US AI spending and consumer demand.
Summary: According to Morgan Stanley Global Chief Economist Seth Carpenter, speaking on the firm's mid-year outlook podcast published May 14:
- Global real GDP growth is forecast at 3.2% in 2026 and 3.4% in 2027, down modestly from 3.5% in 2025
- The base case assumes crude oil returns to around $90 a barrel by end-2026; a failure to normalise could push prices above $150 and trigger recession
- China is least exposed to the energy shock among major economies, Europe most exposed, with the US sitting in between
- US GDP growth is forecast at 2.25% in 2026 and 2.5% in 2027, supported by AI capital expenditure and consumer spending
- The Fed is expected to hold rates through all of 2026, with two cuts possible in the first half of 2027 if inflation retreats; the ECB is forecast to hike twice this year before reversing in 2027
- Global headline inflation is expected to rise to nearly 3% in 2026 before easing, with limited passthrough to core inflation in most economies
Morgan Stanley's global chief economist has outlined a broadly constructive but increasingly uncertain mid-year outlook, with AI investment and US consumer spending providing the growth foundation while an escalating energy shock threatens to complicate the path ahead for inflation, central banks and the global economy.
Speaking on the firm's flagship economics podcast, Seth Carpenter said global real GDP growth is forecast at 3.2% in 2026, easing from around 3.5% in 2025, before recovering to 3.4% in 2027. The baseline remains positive, but Carpenter was direct about the risks attached to oil, describing the task of forecasting crude prices as harder than ever.
The bank's base case assumes oil returns to roughly $90 a barrel by the end of this year and falls further in 2027. If that normalisation occurs, the global economy should be able to absorb the shock. If it does not, and supply disruptions persist, Morgan Stanley warns of a potential shift from a price shock to a volume shock, with crude potentially surging past $150 a barrel. Physical shortages, Carpenter cautioned, would carry far greater consequences than elevated prices alone, given the knock-on effects for petrochemical inputs and broader supply chains.
Exposure to that risk is unevenly distributed. China, which built up substantial oil stockpiles and has sharply reduced imports, is seen as least vulnerable. Europe, a net energy importer that tends to see faster passthrough of energy costs into household bills and business costs, is the most exposed. The US sits between the two, and while domestic consumers will feel pressure at the pump, the economy continues to benefit from strong AI-related capital spending and resilient consumption at the top end of the wealth distribution.
US real GDP growth is pencilled in at 2.25% for 2026, rising to 2.5% in 2027, both ahead of last year's 2.1%. AI capital expenditure, spanning data centres, power infrastructure, processing equipment and software, is central to that outlook and is expected to support a broader lift in business investment over time.
On monetary policy, Carpenter said the Fed is now expected to hold rates through the entirety of 2026, with two cuts possible in early 2027 if inflation cooperates. The ECB is forecast to hike twice this year before reversing course in 2027, while the Bank of Japan is seen continuing its gradual tightening path. Global headline inflation is expected to climb to nearly 3% in 2026, driven by energy, before fading as growth moderates and base effects turn.
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The prospect of the Fed remaining on hold through all of 2026 reinforces a higher-for-longer rate environment that continues to pressure rate-sensitive assets and borrowers. A scenario where oil surges through $150 a barrel and tips from a price shock into a volume shock would represent a material escalation of risk across equity and credit markets globally. Europe's faster energy passthrough and net importer status makes it the most exposed major economic region, a dynamic that could widen the performance gap between European and US assets. AI-related capital expenditure remains a rare bright spot and a potential anchor for broader business investment over time.
