A Summary of Morgan Stanley’s Mid-Year Economic Outlook

In this buzz: Inflation, the Fed, war in Ukraine and much more..

There are several well-known risks to the equity markets and the economy: inflation, the Fed, war in Ukraine along with the on-going effects of the pandemic and continued supply chain disruptions as noted in Morgan Stanley’s (MS) Midyear Economic Outlook. A significant slowdown in GDP growth seems likely though whether the global economy can avoid a true recession is up for debate. Under their base case, Morgan Stanley expects global GDP growth of 2.9% for 2022 which is less than half of 2021 when “massive fiscal stimulus, accommodative monetary policy and COVID-19 business rebounds” resulted in growth of 6.2%

According to its Chief Global Economist, Seth Carpenter, the biggest risks, “a European Embargo on imports of oil from Russia and persistent Covid lockdowns in China – are not likely to occur in tandem.” As Carpenter puts it, “the alignment of those unlucky stars is possible…but it is not something we would count on.” Additionally, MS believes that although inflation is still high in most major economies due to tight labor markets, supply chain issues and commodity price shocks, supply chains should normalize, implying relief to consumer goods inflation later this year and into 2023.

Still, MS economists warn that the downside risks to the economy outweigh the upside potential. A “cutoff scenario” in which all imported Russian energy commodities are suddenly embargoed by Europe could trigger a recession in Europe that could spread to other economies. The U.S. seems vulnerable to a contraction in Europe as the Fed has front-loaded policy tightening. The “drag from these two major economies would spill over to the rest of the world” according to Chief U.S. Economist Ellen Zentner.