The consensus is crumbling. Global growth is no longer a synchronized march toward recovery. It is a fragmented, violent divergence. Morgan Stanley’s Seth Carpenter recently convened a roundtable of the firm’s top economists to dissect this reality. The takeaway is stark. The forces influencing regional growth are moving in opposite directions for the first time in a decade. This is not a soft landing. It is a structural decoupling.
Markets hate uncertainty. They hate divergence even more. When the world’s major economies move in lockstep, capital allocation is simple. When they fracture, the risk premia explode. Per recent reporting from Bloomberg, the spread between US and European growth expectations has reached its widest point since the mid-2010s. The drivers are not just cyclical. They are deeply technical and structural.
The Productivity Mirage
US exceptionalism is back. It is driven by a brutal efficiency. While the rest of the world grapples with stagnation, the US economy continues to defy gravity. The mechanism is simple but misunderstood. It is the lag between capital expenditure and productivity realization. The massive investments in domestic manufacturing and technology over the last twenty-four months are finally hitting the bottom line. This is not just about consumer spending. It is about the total factor productivity of the American industrial base.
Europe tells a different story. The continent is trapped in an energy-price vice. Structural reforms have stalled. The regulatory burden is a tax on innovation that the US simply does not pay. According to Reuters, the Eurozone’s manufacturing PMI remains stubbornly below the 50-point threshold, signaling a contraction that appears more permanent than transitory. The divergence is no longer a forecast. It is a realized data point.
Regional Growth and Inflation Mix
| Region | Projected GDP Growth | Headline Inflation | Policy Rate Bias |
|---|---|---|---|
| United States | 2.2% | 2.8% | Hawkish/Neutral |
| Eurozone | 1.1% | 2.1% | Dovish |
| China | 4.5% | 0.4% | Easing |
| India | 6.2% | 4.8% | Neutral |
The China Stimulus Trap
Beijing is desperate. The roundtable discussions at Morgan Stanley highlighted the diminishing returns of Chinese stimulus. For years, the credit-to-GDP gap was the primary engine of growth. That engine is seized. The property sector remains a lead weight on the national balance sheet. Every yuan of new credit generates less than half the growth it did five years ago. This is the L-shaped recovery that everyone feared but few dared to price in.
The technical reality is a debt-deflation spiral. China is exporting its deflation to the rest of the world. This helps the Fed in its fight against inflation but devastates the manufacturing margins of emerging market competitors. It is a zero-sum game played out in the global supply chain. The Morgan Stanley team notes that the regional forces in Asia are now dictated by who can pivot away from Chinese demand the fastest.
Visualizing the 2026 Growth Divergence
Projected Regional GDP Growth Rates for 2026
The Fiscal Dominance Paradigm
Monetary policy is losing its edge. We are entering the era of fiscal dominance. Seth Carpenter’s analysis suggests that the primary driver of growth in 2026 will not be interest rate cuts, but government spending profiles. The US remains committed to a high-deficit, high-growth model. This forces interest rates to stay higher for longer to combat the inherent inflationary pressure. It is a feedback loop that the market is only beginning to understand.
The bond market is the ultimate arbiter. We are seeing a steepening of the yield curve that reflects this fiscal reality. Investors are demanding a higher term premium to hold long-dated debt in an environment where governments show no appetite for austerity. This creates a crowding-out effect for private investment in regions with weaker fiscal positions. The result is a further widening of the gap between the haves and the have-nots of the global economy.
The next forty-eight hours are critical for this narrative. Tomorrow, the Federal Reserve begins its two-day policy meeting. While a rate change is unlikely, the language regarding the balance sheet and the “higher for longer” framework will be the catalyst for the next leg of the regional fracture. Watch the 10-year Treasury yield at the 2:00 PM EST release tomorrow. If it breaks 4.5%, the divergence between the US and the rest of the G7 will accelerate into a full-blown capital flight.
