By: David Rees, Senior Emerging Markets Economist at global investment manager, Schroders

Global

Revisions to our forecasts mean that we now expect global GDP growth of 2.8% both this year and next, up from our previous projection for growth of 2.6% this year and 2.7% in 2025. That leaves us above consensus and means that we expect most major economies to beat expectations over the next eighteen months. Decent growth should also support a continued recovery in the global manufacturing cycle. However, inflation is also set to be a bit higher at 3.1% this year, due in large to upside surprises from incoming data in the developed markets, before subsiding to a below consensus 2.4% in 2025.

US

The miss in Q1 GDP growth was due to one-off factors and the bigger picture is that underlying demand remained strong at the start of the year. Incoming data points to some softening in the labour market, but the usual lags mean that this is more a story for the real economy in 2025. For the time being, the lagged effect of rising real wage growth looks set to support consumption and drive above consensus growth of 2.7% this year and 2.1% in 2025. Against a backdrop of robust demand, inflation has been sticker than assumed. While steady disinflation is likely – we expect the CPI rate to fall from 3.1% this year to 2.2% next year – we see less room for interest rate cuts. We now expect the Federal Reserve (Fed) to deliver a total of only 75 basis points (bps) of rate cuts.

Eurozone

The eurozone economy emerged from its shallow recession in Q1 and upward revisions mean that we expect GDP to grow by 0.9% this year (0.7% previously) and 1.8% in 2025 – comfortably above consensus. Inflation is also expected to be higher this year at 2.3% versus 2.1% previously as incoming data have been hotter than we had assumed. But we do not expect these inflation pressures to last and have lowered our forecast to 2.4% in 2025. As a result, we expect the European Central Bank (ECB) to get on with interest rate cuts, delivering 150 bps of easing starting in June.

UK

The UK economy also emerged from recession in the first quarter and is now expected to grow by 0.7% this year and 1.3% in 2025, a significant improvement on our previous forecasts of -0.2% and 1.0% respectively. Like in most parts of the world, while inflation has been trending down the process has taken longer than we had assumed. We now expect the CPI rate to average 2.6% this year, with some pick up to 2.8% in 2025. The Bank of England (BoE) should start to cut interest rates in the summer but deliver a total of only 100 bps of easing.

Emerging Markets

We have pencilled in emerging market GDP growth of 4.3% this year (4% previously) and anticipate solid growth of 4% in 2025. China’s economy beat expectations in the first quarter and should continue to fare well on the back of the recovery in the global manufacturing cycle. Elsewhere, lower inflation and interest rates should support activity, while rising commodity prices are likely to be positive for regions such as Latin America.