By Stuart Podmore
Forecasting economic and market variables is inherently difficult, with research suggesting that only 23% of professional forecasts prove accurate. Add in US policy uncertainty – President Trump signed a flurry of executive orders on his first day in office – and the outlook for the global economy is even more challenging to predict than usual.
Given this highly unpredictable geopolitical and macroeconomic landscape, as investment managers we are best served by attempting to decode the current situation as best we can, continually assessing and recoding how it impacts multi-asset decisions over time.
While geopolitics continues to influence global markets at every turn, we believe that central banks’ response to inflation will be key in creating both challenges and fresh yield prospects.
This view is also reflected in our latest Global Investor Insights Survey, with investors expecting central bank policy and higher interest rates to have the biggest impact on their portfolios over the coming year.
Importantly, if we start to see extreme protectionist policies being implemented universally, deflationary forces could come into play for the rest of the world. For instance, if Trump aggressively enforces high trade tariffs and large deportations, this would be stagflationary for the US economy and could slow economic growth for the rest of the world by lowering confidence and amplifying deflationary pressures.
This, however, is not our current baseline scenario. Our current forecast, which we assign a 53% probability to, projects US growth at 2.5% in 2025 and 2.7% in 2026. We expect Trump’s proposed “reflationary” fiscal policies to materially boost growth. However, these policies, which involve significant tax cuts, will likely come at the cost of higher inflation. As a result, we have raised our US inflation forecast from 2.4% to 3.1% in 2025 and to 2.8% in 2026.
In terms of the international economic impact, we predict a slow economic recovery in the UK and Eurozone. Both the European Central Bank and Bank of England have a clear easing bias, but sticky inflation may frustrate policymakers and stunt recoveries.
For China, we have revised our GDP growth forecast down to just 4% in 2025, with only a mild rebound anticipated in 2026. Exports were already set to weaken before Trump's election, while domestic demand remains sluggish. The government’s reluctance to stimulate internal demand through fiscal policy means that growth pressures are unlikely to ease until the second half of 2025.
Globally, we anticipate growth in the region of 2.5-3% through 2025 and 2026. We have nudged down our forecast for GDP growth in 2025 to 2.5%, but expect looser financial conditions to drive a rebound to 2.8% in 2026. All things considered, this baseline scenario is a positive outcome.
Similarly, US consumers appear relatively strong in terms of real wage growth safeguarding purchasing power. Household finance also remains healthy, with US households well positioned and not overleveraged.
In terms of interest rates, contrary to market predictions, we believe that reflationary policies in the US may force the US Federal Reserve to hike rates again in 2026. A similar scenario is predicted to play out in the Eurozone and the UK, with rates forecasted to be above market expectations in 2026.
There is, of course, only a 53% probability attached to this baseline scenario, with a variety of risk factors at play – the most significant being that Trump’s policies will be far more aggressive than anticipated. This would push the US economy into stagflation, tipping the rest of the world towards recession and widening the macroeconomic divergences even further.
Given the exceptionally high level of geopolitical uncertainty facing financial markets, we believe that a dynamic, active investment strategy – focused on carefully selecting opportunities – can help investors navigate volatility while optimising potential returns.
Podmore is Investment Propositions Director at Schroders.
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