US policies may temper global growth: Morgan Stanley

Inflation continues to normalise globally, easing a key concern for policymakers and investors, but progress may slow and vary across countries, it said.

Europe’s growth may be reaching cruising speed around 1 per cent, but global trade disruptions could be a drag, it noted.

China continues to battle deflation as tariffs pose a risk to the country’s over-invested manufacturing sector, while consumption and stimulus may remain insufficient.  Morgan Stanley economists expect the gross domestic product (GDP) deflator in China to barely recover to positive territory as excess supply reemerges due to trade disruptions.

Japan continues to distance itself from its deflationary decades, with a wage inflation trend established and inflation around 2 per cent.

“The outcome of the U.S. election is going to usher in policy changes with implications that will reverberate through the global economy,” said Seth Carpenter, Morgan Stanley’s chief global economist, in a company release.

“Drivers of growth are changing in the US, where we expect the economy to slow in 2025 and even more in 2026 as the imposition of new tariffs and immigration restrictions take hold,” he said, adding that investors globally may likely face increasing uncertainty and regional disparities.

In the United States, inflation may rebound at the end of 2025 because of higher prices and labour costs resulting from new tariff and immigration policies, before it resumes its downward trend in 2026 as growth slows. In the euro area and the United Kingdom, inflation should recede steadily amid underlying growth risks, Morgan Stanley said.

Against this backdrop, central banks across the globe may take divergent actions. US Federal Reserve rate cuts are likely to be on hold by the middle of 2025, while the European Central Bank and Bank of England may continue cutting. Meanwhile, economists anticipate the Bank of Japan will raise rates twice in 2025.