Banking Crisis

Schroders Cuts Growth Forecasts, Says Central Banks Are "Firing Blanks"

Tom Burroughes Group Editor London 4 March 2016

Schroders Cuts Growth Forecasts, Says Central Banks Are

The listed investment house is cutting its GDP growth outlook, concerned that central banks no longer have the ability to boost economies by rate cuts or money printing.

Schroders, the asset and wealth management house, has cut forecasts for global growth to 2.4 per cent from its previous 2.6 per cent rate, arguing that politicians are unlikely to use tax and spending policies to ignite their economies even though central banks have been “firing blanks”.

The UK-listed firm – which announced a new CEO and its 2015 results yesterday (see here) - said its forecast reductions followed modest downgrades to advanced and emerging markets. It has also cut its forecast for inflation for advanced economies because of the fall in the price of crude oil. Forecasts for 2017 are little changed, it said.

“Monetary policy is easier than in our previous forecast. Although we are not forecasting a recession in the US, we now expect the next rate rise in June as weaker global growth and the recent tightening of financial conditions cause the Federal Reserve to delay in March. The Bank of Japan is expected to cut rates further to -0.25 per cent by the end of 2016 and -0.5 per cent by end-2017,” said Keith Wade, chief economist. 

A substantial investment house, Schroders has assets under management, as of the end of 2015, of £313.5 billion ($440.9 billion).

“So growth continues, but our forecasts have drifted toward a world of weaker growth, lower inflation and easier monetary policy. Nonetheless, the longer run outlook remains difficult; underlying growth is weak making the world economy more vulnerable to shocks at a time when monetary policy has become impotent,” Wade continued.

He said fears about the world economy have been “crystallised” by the Bank of Japan’s decision to take the country into negative interest rates, with the associated drop in equity prices suggesting the move was counterproductive.

“Central banks can and will do more, but they are firing blanks. Clearly, governments now need to respond. Our view would be to use fiscal policy, but despite the evidence, we are not optimistic that the politicians are ready, despite the public exhortations, to join the battle,” Wade said.

Wade said the firm is not changing its scenarios in the first quarter because he says they still capture risks facing the world economy. “The balance of probabilities remains skewed in a deflationary direction. It is encouraging that the risk of a deflationary outcome relative to the baseline has not increased in our view, but it remains high and, as discussed above, remains a concern given the low level of interest rates and perception that monetary policy cannot deliver a durable boost to growth,” he said.

 

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