By Schroders’ economists
Global growth is confounding bearish narratives and remains resilient.
Global growth remains resilient and looser monetary and fiscal policies should continue to support activity. The gradual implementation of tariffs has so far helped keep inflation contained, but supply shocks and bubble risks will remain a concern.
We think the US economy will continue to defy bearish expectations and that Eurozone growth will accelerate on stimulus. By contrast, the UK is set to face structural drags amid fiscal tightening and in China the housing bust drags on. Against this backdrop, central bank paths are likely to diverge, shaping opportunities and risks ahead.
We remain constructive on the outlook for the global economy and forecast above-consensus growth of 2.6% through 2026 and 2027. Looser monetary and fiscal conditions will continue to filter through the economy at a time when more extreme policy risks on areas such as trade have eased. But strong activity and additional monetary stimulus leaves the global economy exposed to supply shocks, such as renewed food inflation or labour shortages, and to bubble risks amid the growing disconnect between equities and underlying macroeconomic fundamentals.
There is scant evidence of the US economic slowdown narrative that has become pervasive in markets...
Growth appears to have been strong in the second half of the year and, with the Federal Reserve delivering rate cuts and fiscal policy set to turn supportive, we expect output to increase by more than is generally expected through to 2027. The strong performance of the US economy ought to deter the Fed from cutting rates further in 2026, but much will depend on who is installed as the next FOMC Chair.
...and the Eurozone economy also continues to surprise to the upside.
Growth in the bloc looks set to accelerate throughout our forecast horizon driven by robust monetary and fiscal stimulus. Downside risks to growth have faded, but inflationary pressures are building as supply chain bottlenecks and lengthening delivery times could push up goods prices. A resilient labour market means that services inflation will probably be sticky. With growth momentum intact and inflation risks rising, we expect the ECB to deliver two rate hikes starting mid-2027.
Better news on inflation has raised hopes for additional interest rate cuts in the UK.
It seems likely that the Bank of England will cut rates further, probably by 25bp to 3.75% in December. However, we remain concerned that capacity constraints, chronically weak productivity and minimum wage hikes will ensure that inflation remains sticky and that Bank Rate does not fall as far as the market expects.
We expect the long-term structural slowdown in China will continue, but in the near term some of the recent weakness may reverse.
That said, activity is unlikely to be strong enough to deliver a sustained escape from deflation as the housing bust grinds along, while the government’s continued focus on manufacturing-led growth implies that excess capacity will remain a major concern. This muddle-through scenario means that growth is unlikely to be weak enough to warrant major stimulus, but neither is it likely to be strong enough to match the lofty expectations of the equity market.