In what should be good news all round for investors, economists at Schroders anticipate global growth to be stronger than expected this year.
“We continue to forecast global growth to be stronger than is generally expected, providing a supportive backdrop for risk assets,” said David Rees, head of global economics at Schroders. “But with central banks set to seize on one-off declines in inflation to cut interest rates further and keep monetary conditions loose, we remain concerned that running growth hot will ultimately lead to elevated inflation down the track.”
Such risks, added Rees: “May drive long-term interest rates higher, causing more bouts of market volatility and exposing fragile sovereign debt dynamics once again.”
Breaking the outlook down into geographical regions, Schroders expect US GDP growth to top 3% this year as booming consumer spending looks set to be boosted by additional monetary and fiscal policy support, along with strong tech investment.
Job creation should recover as robust demand, coupled with tighter immigration policies that will constrain labour supply, tighten the labour market again to support real wages, noted Schroders.
Accordingly, the asset manager believes the balance of risks is tilted towards higher inflation.
In the eurozone, growth is on track to beat consensus expectations in 2026–27, Schroders economists said.
In this context, manufacturing will regain momentum, particularly in Germany, where defence and infrastructure spending are set to increase further.
Headline inflation will temporarily ease below the European Central Bank’s (ECB) target in early 2026, but persistent, wage-driven services inflation is likely to push the ECB into tightening from mid-2027.
Although Schroders noted UK growth remains sluggish and temporary dips in headline inflation are likely to prompt further Bank of England rate cuts in the spring.
However, disinflationary fiscal policies that ease energy inflation may leave underlying pressures intact, especially with the labour market yet to show decisive signs of slack.
An upside inflation surprise in 2027 is therefore possible, which “would probably stop the Bank of England from cutting rates further” and could renew “upward pressure on long-dated gilt yields to bring fiscal risks back to the fore”.
When it comes to the outlook for China, its economy may show a temporary rebound, but the ongoing deflationary property downturn suggests the upswing won’t last as stimulus effects dissipate, noted the asset manager.
Subdued domestic demand means firms are unlikely to pass higher global commodity costs onto households, though exporters might. That could shift price pressures abroad, adding “upward momentum to goods inflation in other economies”.
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