A new year may be underway, but the "contours" of the economic outlook for the next twelve months look in some ways similar to last year, according to analysts at Morgan Stanley.
In a note to clients, the bank’s economists including Seth Carpenter and Rajeev Sibal argued that one of the standout examples of this trend is a pattern of sequential growth improvement.
But, they flagged, one key difference is in the state of central bank policy.
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"We are in the easing cycle -- the Fed[eral Reserve] is in easing mode as we begin 2026, which was not the case in 2025," they wrote.
Globally, central banks are also "at or near" the so-called "neutral," or the theoretical level which neither helps nor hinders economic activity.
As a result, the analysts predicted that much of the debate in markets will swirl around central bank decisions in the first half of the year.
In the U.S., third-quarter figures suggested that there has been particular strength in the world’s largest economy, although businesses are beginning to show signs of passing tariff-related costs on to customers rather than letting the expenses eat away at margins, the analysts flagged.
"And so even as the initial read on the nominal spending data for October showed strength, we are still tracking a slowdown in real consumption growth in the fourth quarter relative to the previous quarter. While any slowdown is forecast to be modest since the Fed has already started cutting and fiscal stimulus lays ahead, the contours of the data, nevertheless, will affect the Fed," they wrote.
CME FedWatch has shown that investors are factoring in two rate cuts this year, although the outlook is still murky. In the wake of the Friday’s nonfarm payrolls report, there was just over a 97% chance that the Fed will opt to leave interest rates unchanged at a current range of 3.50% to 3.75% at its January meeting.
The Morgan Stanley analysts added that the U.S. central bank will be "highly reactive" to economic indicators at its "next few meetings."
Elsewhere, business activity in the Eurozone has remained broadly resilient despite decelerating in December versus the prior month. However, the Morgan Stanley analysts noted that "downside risks" to both growth and inflation could manifest in the coming quarters, projecting that the next potential interest rate drawdown by the European Central Bank could come in June.
On the other hand, the Bank of Japan finished 2025 by rolling out a historic rate increase which took its borrowing costs to its highest level in decades -- and more upticks are being priced in by financial markets.
But the Morgan Stanley analysts said "the risks are skewed to fewer rate hikes in 2026," highlighting expectations that inflation will start to soften later this year. While a weaker yen could threaten this call, in theory, more Fed easing -- and its subsequent impact on the U.S. dollar -- would "go some ways to offset that risk," the analysts said.
