In their quarterly update, Schroders’ economists give their outlook for growth, interest rates and inflation.
David Rees, Head of Global Economics, Schroders:
“Global activity held up well during the tariff malaise in the first half of the year and, with peak policy uncertainty now behind us, we continue to find growth expectations too pessimistic. Solid growth should support risky assets, but we think that markets will still need to digest a less supportive monetary policy backdrop.
“In particular, robust growth, high inflation and capacity constraints in the US seem at odds with market expectations for the Federal Reserve to start cutting interest rates in the third quarter towards a terminal rate of 3%. We think rate cuts will ultimately be pushed out to 2026 and that easing now would risk even stickier inflation down the road.”
We remain concerned about the payback from the furore over tariffs and expect export-driven economies to hit a soft patch in the months ahead. But we remain optimistic about the outlook for global growth as looser financial conditions drive a cyclical pick-up in activity. Our forecast for the global economy to expand by 2.5% this year and 2.6% in 2026 remains above consensus.
We continue to expect the US economy to beat expectations. The market has seized on downward payroll revisions and political pressure to price in imminent rate cuts. However, most other indicators suggest that the labour market is still in good shape, while solid fundamentals should continue to support consumer spending. All of this, plus the delayed pass-through from tariffs, suggest that the risks to inflation are to the upside and that immediate rate cuts are not warranted.
Our upbeat view of the Eurozone economy also appears to be playing out. We expect resilient growth in the first half this year to be bolstered by fading uncertainty after the EU-US trade deal was signed, while looser monetary and fiscal policy drive a cyclical acceleration. That does, however, probably mean that the ECB’s easing cycle is now over.
Meanwhile, our assumption that stagflationary pressures would prevent the Bank of England from delivering further interest rate cuts also seems to be on track. GDP growth is unlikely to be much above 1%, but capacity constraints mean that even such meagre rates of growth are likely to keep inflation elevated for a while longer. Indeed, we fear that inflation will breach 4% in the coming months and remain above 3% until at least mid-2026. In the absence of a more pronounced weakening in the labour market, or fiscal tightening in the autumn budget, the bank rate will probably remain at 4% for the foreseeable future.
China’s economy remains stuck in a deflationary housing bust. Growth was solid in the first half of the year as successive delays to US tariffs cleared the way for a front-loading of manufactured exports. But July data were weak and we expect a further deceleration as exports roll over and fading fiscal support weigh on domestic growth. Excess capacity means that deflation remains a concern and that nominal GDP growth is unlikely to match market expectations.
The outlook for the rest of the emerging world is better and could brighten further if the dollar continues to depreciate. Central banks have already seized the space created by the deflationary impulse from stronger currencies to cut interest rates, which ought to boost domestic demand in 2026. India has been at the forefront of the latest rate-cutting cycle, while there is a good chance Brazil will start easing policy before year-end