Economic Roundtable: What’s Keeping Global Growth Going?

Jens Eisenschmidt · Morgan Stanley

Export demand, including AI-related and German chemicals gains from Hormuz disruption, drove Europe's Q2 growth.

Eisenschmidt says Europe's second-quarter growth had an export-led element tied to AI-related demand. He says that even Europe is now receiving more orders from customers, since it is usually seen as the higher-cost end of the spectrum. Geopolitical tensions also helped some producers, such as the German chemical industry, which can deliver products that were previously shipped through the Strait of Hormuz. He expects a similar pattern to repeat in the third quarter.

“There was also an element of geopolitical tensions helping some of those producers say chemical industry in Germany comes to mind that would deliver products that would previously be delivered out of the strait.”at 2:22

Jens Eisenschmidt · Morgan Stanley

Persistent high energy prices and above-4% wage growth will squeeze the European consumer, a key downside risk.

Consumption is about 50% of European spending against about 20% for investment, so it matters more. Eisenschmidt expects wage increases above 4% because European wage setting lags inflation, which is reflected in today's wage agreements. How long that persists depends on energy markets. He says that if you only trust futures curves, the pressure fades quickly, but diesel price paths can make the outlook more pessimistic. He says the consumer will eventually capitulate or need to show some retracement, which makes consumption the number one risk to the forecast.

“the consumer will just capitulate or at least need to show some signs of retracement.”at 7:09

Jens Eisenschmidt · Morgan Stanley

European investment should pick up from here, helped by the AI build-out and the ECB's earlier rate cuts.

Eisenschmidt says investment has not shown a big revival in aggregate yet, but he expects more investment from here. He links this to the AI build-out and to the cyclical position of the economy. He also notes that the ECB cut rates last year and that rate cuts typically show up in investment demand with a lag. He expects investment to become a larger growth driver relative to consumption, though the size of the shift is uncertain.

“While investment has so far, in the aggregate at least, not shown any signs of a big revival and if anything this is what we would expect more investment from here.”at 7:23

Chetan Ahya · Morgan Stanley

Asia's capex upswing, led by tech, is broadening into energy, defense and industrial investment.

Ahya says Asia is benefiting from a strong pickup in capex. It was initially led by the tech sector, but it is now broadening into energy, defense and broader industrial investment. Exports are strong and beginning to broaden from tech goods to non-tech goods. Together these trends support the region's growth despite global shocks.

“Asia is benefiting from a strong pickup in CapEx, which initially was led by the tech sector, but is now broadening out to energy, defense, and broader industrial investments.”at 3:12

Chetan Ahya · Morgan Stanley

Asia's terms of trade are positive despite oil, as export prices lift profits and tax revenue.

Ahya says the region has a positive terms-of-trade position even though oil prices are higher. Higher export prices have boosted corporate profits, which in turn raised government tax revenues. These revenues offset the fiscal pressure from higher fuel subsidies, so the oil shock is not a fiscal drag for the region.

“This has meant that the region has faced positive terms of trade situation despite higher oil prices. Higher export prices have boosted corporate profits and in turn government tax revenues offsetting the fiscal pressures from higher fuel subsidies.”at 3:31

Chetan Ahya · Morgan Stanley

Asia's macro buffers are strong: current account surplus is 4.2% of GDP, so higher rates aren't disrupting growth.

Ahya says macro stability indicators in Asia are in good shape, which differs from earlier cycles. Current account surpluses in the region have widened significantly to $1.6 trillion, or 4.2% of GDP. Private sector balance sheets outside China are also healthy. He concludes that higher oil prices and higher interest rates have not disturbed the region's capex and growth cycle.

“Current account surpluses in the region have widened quite significantly. In fact, it is $1,600,000,000,000 or 4.2% of GDP.”at 3:53

Michael Gapen · Morgan Stanley

AI hyperscaler capex adds about 0.4 to 0.6 points to US quarterly growth, supporting growth.

Gapen's team translates AI hyperscaler capex directly into GDP and finds AI contributes four to six tenths to growth in any given quarter. He says the contribution could be nudged higher if AI is raising productivity, which he believes it is. He also links the AI spending to asset-market appreciation over several years, which supports resilient spending by upper-income households. He concludes that AI-related spending, and its link to asset markets and upper-income households, is the clear answer to US growth resilience.

“And in the direct translation of AI hyperscaler CapEx spending to growth, we find that AI is accounting for four to six tenths contribution to growth in any given quarter.”at 1:04

Michael Gapen · Morgan Stanley

If US growth rests on the AI investment cycle, AI overinvestment is the greater longer-term risk.

Gapen says that the US economy's resilience is being driven by the AI investment cycle. Looking further out, he thinks a potential overinvestment cycle is the greater risk than a near-term shock from rates. The view is conditional on the economy depending on AI capex, and it is framed as a risk over a longer horizon.

“if we look further out, if the resiliency of the economy is driven by the AI investment cycle, then I think a potential overinvestment cycle is the greater risk.”at 11:29

Michael Gapen · Morgan Stanley

US capex is broadening beyond AI into manufacturing, driven partly by supply-chain redundancy and reshoring.

Gapen sees the US investment story broadening, most clearly in manufacturing. He links this to a multipolar world that needs redundancy and supply-chain build-out, which may create an incentive for reshoring, and to spillovers from AI and from geopolitics. He cautions that US manufacturing is only about 10% of output and employment, so the broadening is real but limited in scale.

“So it's not just an AI story. I think you can characterize it as a bit broader.”at 6:18

Chetan Ahya · Morgan Stanley

China's consumer remains weak; a K-shaped recovery with deleveraging households and little big stimulus expected.

Ahya describes China's growth as a K-shaped recovery, with strong exports and AI capex on one side and a very weak consumer on the other. Consumption is weak because the property adjustment is incomplete, the labor market and wage growth are weak, and asset prices have fallen sharply. Households are deleveraging quickly, with consumer debt contracting at 1.5%, which is surprising. He thinks policymakers may respond, but he does not expect a big fiscal expansion, so China is unlikely to provide extra global demand.

“I think the short answer to your question is no. We are still very cautious on China's consumption outlook.”at 9:44

Michael Gapen · Morgan Stanley

A much more dramatic tightening cycle with much higher rates would be a near-term US vulnerability.

Gapen identifies higher rates as the near-term vulnerability for the US economy. The risk he describes is a shift to a much more dramatic tightening cycle, in which interest rates go a lot higher. He treats this as a more immediate threat than the AI overinvestment risk he sees further out.

“if the central bank has to shift to a much more dramatic tightening cycle and interest rates go a lot higher, that would be a near term vulnerability.”at 11:29

Jens Eisenschmidt · Morgan Stanley

Rising long-term rates may tighten euro-area financial conditions too much, a risk for the ECB to manage.

Eisenschmidt says European monetary policymakers are debating whether long rates have risen too much, which would present a significant tightening of financial conditions. He treats balancing this as a real risk that calls for caution. He lists interest rates or a too-tight monetary policy stance as one of three main risks to the European outlook, alongside energy-driven consumption and the investment cycle.

“the degree to which long rates have increased maybe too much and present a significant tightening of financial conditions.”at 11:57

Chetan Ahya · Morgan Stanley

Oil above $130 to $150 would hurt Asia, forcing governments to pass higher prices on to consumers.

Ahya names oil prices as one of Asia's two main risks. He sees a threshold of $130 to $150 per barrel as the level that would be a problem for the region. At that level, governments would finally have to pass higher oil prices on to consumers. He adds that a combination of higher oil prices and a contraction in US AI investment would be a big shock to Asian growth.

“on oil prices, I would say a threshold of $130 to $150 of oil would be a problem for the region.”at 12:41