Keith Wade, Chief Economist & Strategist
Azad Zangana, European Economist
James Bilson, Economist
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For professional investors and advisers only. This document is not suitable for retail clients.
We have updated our forecasts with an upgrade to US growth on signs that capital spending is picking up and the banking sector is returning to health. Fiscal tightening will still drag on activity, but we expect this to be offset by a pick-up in investment. Stronger US demand will help global trade and we have raised our forecast for China. However, we have cut our Eurozone growth forecast, largely as a result of the stronger euro. Our overall global growth forecast is little changed as the transatlantic divide widens.
Inflation is expected to remain subdued as global demand is not strong enough to put upward pressure on commodity prices or wages given the slack available. However, the improvement in US growth means that the Federal Reserve’s asset purchase programme will be increasingly brought into question.
In the near term the greatest uncertainty is over the US where there is still a risk that the economy retrenches in response to the tightening of fiscal policy. However, there are also upside risks to US growth and with the downside risks in Europe contained, our risk scenarios have become less skewed towards deflation.
Downgrading Europe
A weaker than expected end to 2012 has caused us to revise down growth for 2013 as a whole, however, the recent strength of the euro and the lack of desire to fight a currency war leads us to downgrade growth even further – especially for exporters like Germany.
However, Germany is still set to lead the Eurozone out of recession, but France appears to be further behind thanks to the fiscal squeeze. More is on the horizon as France is behind on its growth and deficit targets.
Meanwhile the UK is also being downgraded, but in contrast with the Eurozone, driven by the depreciation in sterling, which is likely to raise inflation in the short-term, and hit the purchasing power of consumers – the biggest driver of the economy.
Growth outlook diverges amongst the BRICs
We have raised our forecast for China for both 2013 and 2014, owing to a strong rebound in the property market and improved signs from the external sector, but have downgraded Brazil, Russia and India. Nonetheless, in aggregate this year should represent a significant improvement from the last.
Important Information: For professional investors and advisers only. This document is not suitable for retail clients.
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Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA, which is authorised and regulated by the Financial Services Authority.
Source: ETFWorld – Schroders
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