Schroder Investment Management Australia Limited publishes Economic and Strategy Viewpoint Q3 2026 global markets; long-term yields may surge on credibility concerns

Economic and Strategy Viewpoint - Q3 2026

Despite fading macro fears, the biggest risk to markets may come from rising long-term yields as concerns over central bank credibility intensify.

Having brushed off the Iran shock, we continue to believe that the global economy will deliver solid growth over the coming years and that inflation is the bigger concern. Accordingly, rather than recession, the biggest threat to risk assets is that question marks over central bank credibility cause long term yields to surge higher.

We continue to see a favourable backdrop for the global economy , with GDP growth still expected to expand by around 2.5% in 2026 and 2.6% in 2027. But there has been considerable rotation beneath the surface. The UK has surprised to the upside, prompting an upgrade to our 2026 GDP forecast, while the eurozone has also proved more resilient than anticipated. US growth is broadly unchanged and Japan continues to outperform consensus, whereas weaker domestic demand and fading export momentum have led us to downgrade China.

Read the full Economic and Strategy Viewpoint Q3 2026

It is a similar story for inflation. Our global forecast remains broadly unchanged, with inflation expected at 3.3% in 2026 before easing to 2.7% in 2027. Persistent domestic price pressures have led us to raise our US inflation forecast, while inflation in Japan is expected to remain above the Bank of Japan’s (BOJ) target. In the eurozone, resilient activity and sticky services inflation have increased the risk of second-round effects, whereas greater labour market slack should limit those pressures in the UK for now. China remains the exception, with weak domestic demand containing inflation at home even as higher producer prices could spill into global goods prices. The key policy implication is that inflation is proving persistent enough in several major economies to force central banks back into action.

In the US , doubts have arisen about the Federal Reserve’s (Fed) commitment to returning inflation to target, but we put this down to clumsy messaging by a Chair reluctant to provide forward guidance. Other Federal Open Market Committee (FOMC) members have been forthright in stating that some tightening may be required to return inflation to target. With the economy proving resilient and domestic inflation pressures elevated, we expect the Fed to begin raising rates later this year.

Meanwhile, resilient eurozone activity in the face of energy shocks means that we have nudged up our growth forecast this year. But sticky inflation and further interest rate hikes mean that tighter financial conditions are likely to take some of the gloss off growth in 2027 as several key members of the bloc head to the election polls.

In contrast to other parts of the world, loose labour market conditions in the UK ought to prevent high energy prices from becoming a broader inflation issue, providing the Bank of England with cover to keep rates on hold this year. However, we suspect a more expansive fiscal stance from the new Prime Minister will require some monetary tightening further down the road.

Japan’s economy is expected to outperform consensus, supported by fiscal stimulus, rising real wages, and AI-related investment. Inflation is projected to remain above the BOJ’s 2% target as robust wage growth and higher import costs keep underlying inflation elevated. This should allow the Bank of Japan to accelerate the pace of policy normalisation.

Incoming data support our view that China’s economy would struggle in mid-2026 as underlying weakness in the domestic economy came to the fore. With exports yet to roll over, there could be more pain in the months ahead. As such, while the authorities declined to step up meaningful policy support at the July Politburo meeting, we suspect they will be forced into action later this year.

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