Recovery signs clouded by political uncertainty

The global economy seems to be heading into recovery mode as the adverse effects of the previous surge in inflation subside. Real incomes are recovering in most advanced economies and China is feeling the benefits of policy support. Admittedly, political factors risk jeopardising the recovery just as it gets going. The US election later this year could trigger inflationary, growth-sapping tariffs and the snap election in France has put its fiscal outlook in doubt. But India’s election yielded a stable coalition that is unlikely to upend the reform agenda and we doubt that a new government in the UK would change its recovery prospects. On balance, while there are risks of a worse outcome, the global picture is that inflation should continue to ease and that fiscal policy will be tightened gradually. This should allow central banks to cut interest rates a bit more than markets anticipate and leave world GDP expanding at around its potential pace of just over 3%.