Clouds are forming for the global economy

The Organisation for Economic Co-Operation and Development (OECD) sees clouds forming for the global economy, Federal Reserve expectations indicate an increased risk of stagflation in the US, and the Bank of England is taking a hawkish tone due to global uncertainty. Meanwhile, both Germany and China took steps toward greater fiscal stimulus that could improve sentiment for stocks. Here’s what we learned last week, and what I’m watching next.

The OECD lowers its projections for global growth

Last Monday, the OECD came out with an interim report revising its economic forecasts. It recognized that clouds are forming. While the global economy had remained resilient, recent activity indicators showed signs of a softening of global growth prospects, business and consumer sentiment had weakened in some countries, and indicators of economic policy uncertainty had risen markedly around the world. This has caused some revisions to growth projections.

In its report, the OECD:

• Lowered its projections for 2025 global gross domestic product (GDP) growth from 3.3% to 3.1% and for 2026 from 3.3% to 3.0%.¹
• Forecasted US economic growth would slow to 2.2% in 2025 before easing to only 1.6% in 2026. This was a downward revision of its previous forecasts of 2.4% and 2.1% respectively.¹
• Forecasted that the Mexican economy will contract 1.3% this year — a huge change from its prior forecast of 1.2% growth.¹
• Forecasted that Canada’s growth rate would slow to 0.7% this year and next, well below the previous forecast of 2.0% for both years.¹
• Upped its forecast for 2025 Chinese GDP growth from 4.7% to 4.8%. It kept its forecast for 2026 growth at 4.4%.¹

The most important takeaway is that the OECD warned that significant changes had occurred in trade policies that, if continued, would hit global growth and cause a rise in inflation. This is a valuable reminder that tariff wars can hurt global economic growth, especially if they’re prolonged. However, I think the far greater issue is dramatic cuts to government spending. We’ll want to follow that closely.

Fed expectations reflect concerns about economic growth

Last Wednesday, the Federal Reserve (Fed) decided to keep rates unchanged, but that was expected. I was focused on what we would learn from the new “dot plot” (which charts Fed members’ expectations for rates in the coming year and beyond) as well as the press conference.

The dot plot reflected lower expectations for growth and higher expectations for both inflation and unemployment. The obvious takeaway is that the risk of stagflation has increased. The Fed also expects a median 50 basis points in rate cuts this year. This suggested to me a dovish tilt, as the Fed seems more concerned about negative impacts to growth than a resurgence in inflation.

That theme also came across in the press conference, as Chair Jay Powell seemed dismissive of a potential resurgence in inflation, using the now-famous term “transitory” to describe it. (I agree that tariffs are unlikely to cause sustainable price increases so long as they are short-lived; recall that price increases stemming from tariffs in the first Trump administration were temporary.) In addition, Powell warned again that job creation has been low. So far, that’s been matched by a relatively low level of job cuts, but if job cuts were to pick up, that would create an imbalance that would cause an increase in unemployment. Clearly the Fed is more concerned about growth, in my opinion.

Bank of England takes a hawkish tone

The Bank of England (BOE) also held rates steady when it met last week and seemed more hawkish than expected. The most important takeaway is that — spoiler alert — the BOE recognizes there has been a significant increase in uncertainty in the global economy.

While recognizing two-sided growth and inflation risks, the Bank of England — unlike the Fed — seems more concerned about the risk of a resurgence in inflation. This syncs with what we’ve heard recently from BOE policymakers. In a speech several weeks ago, Deputy Mayor David Ramsden warned that there was an increased risk of inflation rising given increasing wage growth.²

It’s a difficult time to be a central banker, and so I empathize with the BOE. I appreciate its articulated willingness to be flexible about the path of monetary policy this year. I expect likely budget cuts in the UK will create some growth headwinds (and exert some downward pressure on inflation) that’ll cause the BOE to be more worried about growth than an inflation resurgence, just like the Fed. This in turn will likely necessitate more monetary policy easing than is currently expected. Stay tuned.

Germany takes steps to boost defense and infrastructure spending

German lawmakers passed a critical spending package last week, helping to clear the way for 1 trillion euros in debt financing for defense and infrastructure spending. This is a dramatic departure from years of budget austerity that have negatively impacted German economic growth. I don’t think we can underestimate the impact of this in terms of a fiscal impulse and continued improving sentiment for European stocks.

China focuses on increasing consumption

China will see even more fiscal stimulus this year. It announced a “Special Action Plan to Boost Consumption” last week, which comes on the heels of better-than-expected economic data for January–February. I’m encouraged by the focus on increasing consumption by strengthening demand. We’ll want to follow this multi-pronged effort closely.

Looking ahead

As we head into a new week, we’ll no doubt continue to see signs of the tectonic shift in fiscal stimulus around the globe. In my view, the US is on a dangerous path of continuing to aggressively cut fiscal spending while economies like Germany and China will be adding fiscal stimulus. (I’ll of course be following signs of “brown shoots” and “green shoots” around the world.) As I mentioned before, to me this is far more important than ongoing tariff wars, as their impact is likely to be very temporary in nature, so long as they don’t last for an extended period of time.

What’s happening in the global economy has implications for various assets. The ongoing economic policy uncertainty and rising geopolitical risks have created increased demand for gold, which is likely to continue as these conditions show no signs of abating. There’s opportunity for stocks where there’s potential for positive surprise, and that can come from greater fiscal stimulus. However, sovereign debt is likely to be punished in countries where government borrowing rises significantly — hence the rise in the 10-year German bund yield in the last several weeks. With the risk of a resurgence in inflation potentially slowing some central banks’ path of easing, I believe bank loans could benefit handily.

Speaking of fiscal policy, I’ll be waiting eagerly for the Spring Statement from UK Chancellor Rachel Reeves on March 26. It’s unclear exactly what the plans are going forward — tax increases or government spending cuts or a little of both — so this revelation will be important in assessing the state of fiscal policy in the UK. It may be creating headwinds for its economy if fiscal spending cuts are significant.

In terms of data, I’ll be keen to see the US personal consumption expenditures (PCE) print; this is the Fed’s preferred gauge of inflation and gives us a sense of whether consumers are right to expect inflation to rise significantly. Also important will be gauges of US consumer expectations regarding the economy and inflation (both the Conference Board and University of Michigan release this week), as well as eurozone consumer confidence. Finally, we will also get Purchasing Managers’ Index readings for a number of major economies, which can offer helpful leading economic indicators.

The week ahead