‘Beautiful Bill’ to provide slight GDP boost through 2027, Morgan Stanley says

Morgan Stanley projects the 'One Big Beautiful Bill' will offer only modest GDP support (0.4pp in 2026), insufficient to counteract new tariff threats from the Trump administration, which could see effective rates rise to 17-18% by August 1. While the firm maintains its baseline growth outlook, citing potential tariff 'off ramps,' it warns of significant upside risks to inflation, potentially keeping it above 2% well into 2026. Consequently, Morgan Stanley reiterates its expectation for a 'slow-growth, firm-inflation economy' driven by combined policy effects.

Analysis

Morgan Stanley's analysis indicates that the 'One Big Beautiful Bill' (OBBB) will provide only a modest fiscal impulse, forecasting a 0.4 percentage point addition to real GDP in 2026 and 0.2pp in 2027. The firm concludes this stimulus will be insufficient to counteract the negative economic effects of proposed tariffs and immigration controls. The primary risk highlighted is the new tariff threat against approximately 20 trading partners, which could elevate the effective U.S. tariff rate to 17-18% by August 1. While Morgan Stanley has not yet revised its baseline growth forecast, citing the possibility of 'off ramps' preventing tariff implementation, it warns that inflation risks are skewed to the upside. The potential tariffs could keep inflation 'meaningfully above 2% well into 2026.' This combination of factors underpins the firm's expectation of a 'slow-growth, firm-inflation economy,' where the impact of contractionary policies like tariffs may outweigh expansionary fiscal measures.

Key Decisions for Investors

• Given the forecast for a 'slow-growth, firm-inflation' environment, investors should review portfolio exposure to cyclical sectors vulnerable to slowing growth and consider assets that could hedge against persistent inflation.
• The primary variable is trade policy; therefore, closely monitor developments around the threatened tariffs and any potential 'off ramps' ahead of the August 1 deadline, as this is the key factor that could alter the baseline economic outlook.
• Consider favoring investments in sectors with lower sensitivity to international trade and supply chain disruptions, while exercising caution with industries that are highly exposed to rising input costs from tariffs or a slowdown in consumer spending.