SINGAPORE (Apr 4): Schroders is raising its global growth forecasts for the next two years on the back of buoyant economic activity, but warns of uncertainty for investors amid a corresponding rise in interest rates.
“Donald Trump’s plan to boost the US government’s spending by $300 billion has added fuel to a US and global economy already firing on all cylinders,” says Keith Wade, Schroders’ chief economist and strategist in an April note.
However, Wade believes global economic growth will be spurred by more than just the US’s spending plans.
“Data from purchasing managers surveys, business and consumer confidence are also buoyant. Indeed, our indicator of global economic activity is at its highest level in seven years,” he adds.
In this light, Schroders is raising its global growth forecasts up 0.2 percentage points to 3.5% for 2018, and up 0.3 percentage points to 3.3% for 2019.
At the same time, interest rates are also expected to rise. “By the end of 2019, we now expect US rates to have reached 3% and for the UK to hit 1.25%,” Wade says.
In the US, the economist expects four more rate hikes in 2018, and two in 2019, on the back of the start of balance sheet reduction and a rise in core inflation.
Meanwhile, he says the European Central Bank (ECB) is likely to end quantitative easing in September this year, before raising interest rates three times in 2019.
In the UK, Wade says concerns that supply constraints will cause inflation to rise could lead the Bank of England (BoE) to bring forward an interest rate hike that was predicted to come in November 2018. BoE is also expected to hike rates twice more in 2019.
“The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested,” Wade cautions.