Economic Views

TalkingEconomics: Global forecast update - political risks fade, macro risks return

The global recovery remains intact and political risks have eased, but more traditional macroeconomic concerns return to the fore.

06/02/2017

Keith Wade

Keith Wade

Chief Economist & Strategist

The recovery in global activity remains intact, while inflation appears to have peaked following the stabilisation in energy costs. We continue to forecast global growth at 2.9% this year after 2.6% in 2016, but have trimmed our inflation forecast to 2.4% from 2.7% to reflect a lower oil price profile and subdued core readings.

Divergence is a growing theme on the growth side as an upgrade to the eurozone is offset by a downgrade to the US and emerging markets. Looking into 2018, global growth is expected to stabilise at 3% with modest downgrades to developed markets offset by a small upgrade to Japan.

The inflation dog has yet to bark

The continued good behaviour of inflation is critical in shaping the outlook for monetary policy and markets. We still expect a modest upward increase in core inflation in 2018 as unemployment falls further in the US, but not enough to prompt an aggressive tightening of monetary policy by the central bank.

We expect the Fed funds rate to rise to 1.5% this year (three hikes) and to 2% by end-2018 (two hikes). Within this time period, we see a pause in the first half of next year as the Federal Reserve (Fed) begins balance sheet reduction.

Elsewhere, interest rates should remain on hold. No change to Chinese rates is expected this year, but they could fall further in 2018 as activity softens. We expect the ECB to continue quantitative easing (QE) over the forecast period, but begin tapering in 2018. The Bank of Japan is expected to keep rates on hold, but maintain QQE (quantitative and qualitative easing) as it struggles to reach its target of above 2% inflation.

Scenarios: fading political risks 

Compared to our last forecast update in February, the balance of risk has shifted in a more deflationary direction with the return of hard landing concerns over China and secular stagnation. Stagflation is an economic condition in which economic growth slows but inflation rises. 

The stagflationary risks have diminished with the loss of the “rising protectionism” scenario. The political risks associated with the Trump administration have also eased with the decline in weight on the “fiscal reflation” scenario. On balance, lower political risks in Europe and the US have been replaced by some of the traditional macroeconomic risks around China, secular stagnation, inflation and the unwinding of QE by the Fed.

 

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.