In a statement, Schroders chief economist and strategist Keith Wade expects positive outlook for the global economy in 2018, which rides on the back of strong economic performances in Asia, Europe and the US in 2017.
It added that the leading indicators suggest global growth in 2017 has been the strongest since 2011. This is the result of unmaterialised political risks in US and Europe, improvements in global trade that has reached 5% this year benefiting emerging markets, and an upswing in corporate earnings which have been a driving force for markets in all three regions.
“The global growth upgrade is reflected across advanced and emerging economies. In the former we have increased our US forecast for 2018 to 2.5% from 2%, and our eurozone projections to 2.3% from 2%.
“Japan is forecast at 1.8% (previously 1.5%), and emerging markets is forecast at 4.9% (previously 4.8%) which incorporates a slightly stronger figure for China in 2018 at 6.4%,” Wade said.
Fund management company said the upturn in global growth has lifted sentiment and markets, but investors and central bankers remain puzzled by the behaviour of inflation.
“The strong growth of the world economy raises the question as to whether inflation will also accelerate and bring a greater tightening of monetary policy. So far, the acceleration in activity has not triggered higher inflation, but the question is whether the ‘Goldilocks’ combination of strong growth and low inflation can persist in 2018,” Wade said.
Schroders expects 2018 inflation to be at 2.3% revised up from 2.2%, driven by higher oil and commodity prices which is reflected in the pick-up in producer price inflation around the world in recent months.
Additionally, Schroders expects further tightening of monetary policy by the US Federal Reserve (Fed), and with fiscal policy providing an extra boost to growth, it believes there will be three rate hikes next year after an increase in rates at the December meeting.
“The Fed has now started balance sheet reduction, signalling the arrival of quantitative tightening. We forecast the Fed funds rate to end 2017 at 1.5% and 2018 at 2.25%. We would then expect one more rate rise in 2019 taking the policy rate to 2.5% where it peaks.
“Given the reduced trend rate of growth in the US, the peak in this cycle is expected to be well below that seen in previous cycles, something the Fed has been signalling through their ‘dot’ forecasts of the long run policy rate,” Wade said.
“In terms of monetary policy elsewhere, we have a tighter projection for the European Central bank (ECB) in that we assume quantitative easing (QE) will end in September next year. Growth and inflation are expected to be robust enough for the central bank to call time on QE earlier than most would expect. The ECB then raises rates in 2019,” he added.
“In Japan, we assume that QE continues, however there is a strong likelihood of a shift in policy with the Bank of Japan likely to increase its target for 10-year Japanese government bond yields. As with the ECB this will be driven by a robust economic performance and although such moves may only be modest they represent a turning point toward tighter policy, an event which will not be missed by the markets,” Wade said.