TalkingEconomics: Rising political risk
Schroders' economists give their latest forecasts for growth, inflation and monetary policy, and consider the recent rise in political risks.
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.
This communication is marketing material. The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy.
The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.
Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall.
Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.
Issued by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.