Schroders Economists: "Global growth to be stronger than generally expected"
"We continue to forecast global growth to be stronger than is generally expected, providing a supportive backdrop for risk assets,” says 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 may drive long-term interest rates higher, causing more bouts of market volatility and exposing fragile sovereign debt dynamics once again.”
Perhaps the biggest change to Schroders’ economists baseline forecast is that they now assume further cuts to interest rates in the US and UK. To be clear, they do not believe additional easing from here is wholly justified by macroeconomic fundamentals, notably in the US, where consumer spending is booming. But policymakers appear to have an easing preference and are therefore likely to seize any opportunity that presents itself to cut rates.
In the UK, budgetary measures are likely to lower headline inflation to the 2% target in April, while in the US recent price data appear to have been artificially depressed by the loss of October data, at a time when many will focus on rent disinflation. These factors may give policymakers a window of opportunity to ease this year. However, with growth holding up and scant reliable evidence of genuine slack in labour markets at a time when core services inflation is still elevated, the risks of a nasty inflation shock down the road are building.
Schroders’ economists 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. Accordingly, we believe the balance of risks is tilted towards higher inflation.
In the Eurozone, growth is on track to beat consensus expectations in 2026–27. 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.
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.
China’s economy may show a temporary rebound, but the ongoing deflationary property downturn suggests the upswing won’t last as stimulus effects dissipate. 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.
Further reading : Economic and Strategy Viewpoint – Q1 2026
