Economic and Strategy Viewpoint - March 2018
This month we focus on our latest forecast updates. These include an upgrade to global growth for 2018 which could fuel higher inflation, especially in the US.
Forecast update: Trump pours fuel on the fire
- Continued strength in leading indicators and the announcement of further fiscal expansion in the US have led us to upgrade global growth for 2018 to 3.5%. However, stronger growth is likely to fuel higher inflation particularly in the US where cyclical pressures have built.
- The US Federal Reserve is now expected to raise rates four times in 2018 and twice in 2019 as they lean against the boost from fiscal policy. The US dollar could firm as a result, even as the twin deficits return.
- Our scenario analysis shows the balance of tail risks to be tilted toward stagflationary and reflationary outcomes, both of which contain higher inflation compared to the baseline.
European forecast update: firing on all cylinders
- The eurozone economy is firing on all cylinders. Domestic demand is the key driver of growth, while the recovery in world trade continues to surprise to the upside. In updating our forecast, we find ourselves upgrading growth once again, though inflation is expected to be a little more subdued due to the strength in the euro. Meanwhile, the European Central Bank is preparing the ground for a tightening in policy.
- The UK economy has gone from being one of the strongest economies in the G7 to the weakest. Higher inflation continues to squeeze the living standards of households, while Brexit uncertainty is weighing on business confidence. The UK forecast has been revised up, but only thanks to strong growth in the US and eurozone. Inflation has been revised up, along with our interest rate forecast. The Bank of England is now expected to hike this year due to concerns over supply constraints.
EM forecast update: A brighter outlook
- Stronger global growth should propel trade, benefitting emerging markets and so prompting us to upgrade most of the BRICs. Inflation pressures remain largely under control but will likely necessitate hikes in many cases in 2019.
Views at a glance
- A short summary of our main macro views and where we see the risks to the world economy.
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.