World economic recovery faces inflation headwind

The world economy has started 2017 with strong momentum and we have nudged our global growth forecast higher as a result. However, we remain sceptical as to whether current strength will be sustained further out. Our 2018 forecast is unchanged as upgrades to the BRIC (Brazil, Russia, India and China) economies, Japan and the UK are offset by a downgrade to the US

Our scenario analysis shows that the risks around the baseline are slightly more balanced, but are still skewed toward stagflation with rising protectionism the highest probability alternative. Stagflation is an economic condition in which economic growth slows but inflation rises. 

We have also revised up eurozone growth and inflation. We expect the European Central Bank (ECB) to begin tapering its quantitative easing (QE) programme over 2018. In the UK, we also forecast higher economic growth and anticipate that the authorities will trigger Article 50, starting the formal negotiation process for the UK to leave the EU 

We are broadly more positive on the outlook for emerging markets (EM) with the US likely to prove more supportive for global growth. Recovery continues in Brazil and Russia, and India seems to have suffered less than the market feared from demonetisation. Chinese policy, meanwhile, looks unlikely to deliver upsets