What is your outlook for the British economy?
The British economy has strong potential and a solid medium-term outlook. But over the next year or so, I think growth will be neither strong nor weak. It will slow from 1.4% last year ato about 1% this year because of three factors: first, the lingering drag from higher interest rates; second, weak overseas demand; and third, fiscal policy, in particular higher business taxes, which will restrict growth.
Will inflation fall to the 2% target in 2026?
Yes, it will, and it’s been a long time coming. Inflation in Britain has been higher than it should have been for the best part of five years. It stood at 3.2% on the latest reading. By April this year, we’ll be back at 2%. I wouldn’t be surprised if inflation is a bit below the 2% target later this year. This won’t mean prices are falling; it just means prices are rising more slowly than before. People will continue to notice that shop prices remain high, especially for food items.
Do you expect interest rates to fall?
Yes, most people are expecting interest rates to fall this year. We think the Bank of England will cut them to about 3% this year with three more 25-basis-point cuts. This is faster and further than the consensus view.
Would a change of leadership in Number 10 affect your outlook?
This has been on our minds for much of the past year. It is perfectly possible that not a lot could change. A new leader might come in – there’s usually a bit of a sentiment-driven goodwill bounce – and they might continue with current efforts to reduce the fiscal deficit through taxation. But in reality, change only happens if it offers something different, and we think that is the more likely scenario. Should there be a change in leadership, we expect it to loosen fiscal policy a little. If they do that moderately, maybe interest rates and gilt yields won’t fall quite as far as we think – or they may even rise. The risk is that the new leadership decides to go big and really loosens fiscal policy. If that happens, there’s a risk of market disquiet and volatility in the gilt market.
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What is the outlook for the US?
We are more optimistic than most. In particular, we think that the AI-related boost in investments will more than offset the drag on the economy from Trump’s tariffs and immigration policies. Economic growth in the US will accelerate from about 2% last year to 2.5% this year – growth that we expect to be sustained in 2027. Because the economy will be stronger, inflation will be higher than it otherwise would be. As a result, the Federal Reserve won’t cut interest rates as much and we think the most you will get is one interest rate cut. That said, if Trump’s growing attacks on the Federal Reserve’s independence continue, a new Chair will be under pressure to cut interest rates further.
What do the current geopolitical tensions mean for the global economy?
The near-term implications for the global economy are probably relatively small, even though this is headline news. Take Venezuela in the 1970s, for example. It accounted for about 1% of global GDP and 8% of global oil supply. Now it accounts for 0.1% of global GDP and 1% of global oil supply, so it’s not economically important on the global stage. Iran, on the other hand, is more significant because it is a larger oil producer, which is creating a bit more uncertainty. Oil prices have risen from about $60 to about $63 a barrel, but it remains to be seen what happens there. Our view is that other significant increases in global oil supply will cause oil prices to fall to about $50 a barrel this year, though this will depend on political developments.
How do you quantify unforeseen political events in your forecasting? After all, not everything that counts can be counted.
We analyse measurable factors such as the size of the economy and ore production before considering broader political developments and their implications for future economies.We see the world as being fractured into two blocs, one led by the US and the other by China. The recent events in Latin America and the Middle East feed into that. Venezuela was one of Russia and China’s closest allies, but now it seems to be moving back towards the US. The US is also more willing to intervene in Europe (Greenland) and the Middle East (Iran).
This leads to the sense that the US is working to reinforce its global network. If we map out these two blocs, they appear similar in physical size. However, when considering the economic sizes aligned with either the US or China, the US bloc is actually more substantial and likely better positioned for the next 10, 20 or 30 years. Most people think China will eventually outgrow the US. But actually, if our division of the global economy into these two blocs is correct, then the US will remain the world’s largest economy.
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