Schroders' economists forecast resilient global growth amidst changing monetary policies

Schroders' economists have painted a robust picture of the global economic landscape, hinting at a favourable outlook for risky assets amidst a landscape of changing monetary policies.

As economists navigate the complex interplay between growth prospects and monetary policy, the unfolding economic landscape promises to be one marked by resilience, ongoing challenges, and cautious optimism.

In a quarterly update on Wednesday, David Rees, head of global economics at Schroders, reported that despite having navigated a challenging period characterised by tariff-related uncertainties, global activity has managed to hold steady in the first half of the year.

"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," Rees said.

"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." 

Despite concerns regarding the backlash from tariff issues, Rees remains optimistic about global growth overall, forecasting a 2.5% expansion in 2023 and 2.6% in 2026—levels that exceed current consensus estimates.

"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," Rees said.

"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." 

Schroders said the outlook for the Eurozone was similarly encouraging. With recent developments, including the EU-US trade deal, uncertainties are beginning to ease.

Schroders said it anticipates that looser monetary and fiscal policies will catalyse a cyclical upturn, leading to resilient growth in the first half of this year. However, this buoyant forecast for the Eurozone suggests that the European Central Bank (ECB) will likely halt its easing cycle.

Across the Atlantic, Schroders said the UK faces its own challenges amid stagflationary pressures. The Bank of England's capacity to enact further interest rate cuts remains constrained, and growth projections languish just above the 1% mark.

"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," Rees said. 

On the other end of the spectrum, Rees said China was grappling with a deflationary housing sector. Following a solid first half of the year fuelled by export growth, July data indicates a downturn, as the effects of declining exports and diminishing fiscal support start to take hold. Rees highlights, “

"Excess capacity means that deflation remains a concern and that nominal GDP growth is unlikely to match market expectations," Rees said.

Looking at the broader emerging market landscape, Rees said the outlook was more promising, particularly if the dollar continues to weaken.

He said regional central banks are leveraging the deflationary environment to cut interest rates, which should enhance domestic demand heading into 2026. Countries such as India have already begun this rate-cutting cycle, while Brazil may follow suit by year-end.

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