TalkingEconomics: Rising political risk

Schroders' economists give their latest forecasts for growth, inflation and monetary policy, and consider the recent rise in political risks.

1 June 2016

Schroders Economics Team

Our forecast for global growth in 2016 remains unchanged at 2.5%, as reductions in our projections for the US and Japan are offset by increases to the eurozone and China. On balance, global inflation is forecast to rise to 2.2% this year (from 1.8% in 2015) and to 2.4% in 2017.

Monetary policy: the Fed in an election year

Although a US rate rise in June remains a possibility, we now expect the Federal Reserve (Fed) to delay its next move until September.

This will be close to the presidential election (8 November), but evidence suggests that the likelihood of a Fed rate change does not significantly decrease in the run up to the vote.

We still expect the Fed funds rate to rise in two steps to 1% by end-2016 and by a further two hikes to 1.5% by end-2017.

Elsewhere, we no longer expect the Bank of Japan to take rates lower but we do expect it to start experimenting with helicopter money drops towards the end of 2017. We discuss our outlook for European policy in the next section.

Currency wise, we still look for the US dollar to strengthen against the euro, but the US unit now has a weaker profile against the Japanese yen (JPY), Chinese yuan (CNY) and the British pound (GBP) in 2016.

Scenario analysis: risks skewed toward weaker growth

We have made some significant changes to our scenarios: political risks have risen and in response, we are adding in a "trade wars" scenario and a "Brexit shakes Europe" scenario.

The former is based on the election of Donald Trump as president of the US, which brings a significant increase in tariffs on imported goods and retaliation from those who are hit by such moves, prompting a contraction in global trade and higher inflation.

The second new scenario follows from a UK vote to exit the EU, which galvanises anti-EU support across Europe, resulting in increased in uncertainty and slower growth as companies postpone major investments.

The balance of probabilities remains skewed toward a weaker growth outcome versus the baseline, but by less than in Q1 as a result of the reduced risk of a China hard landing or US recession.

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