The world is in a new era of low growth and high interest rates, according to BlackRock, the world’s largest asset manager.
It warned that inflation will be far more volatile than it has been in recent years – and economies can no longer grow as quickly as they have in the past without stoking price rises.
Alex Brazier, the deputy head of BlackRock Investment Institute and a former Bank of England official, said: “We’re now in an environment of structurally more muted growth and structurally higher rates than we had before the pandemic.”
He added: “We’re not going back to how things used to be.”
BlackRock, which manages assets worth $9.4 trillion (£7.5 trillion), said that markets were still adjusting to this new reality. As a result, investors had to be more selective and precise to make returns than in the past 15 years of mostly low inflation, it said.
Several big shifts like ageing demographics, greater climate investment and the AI race will push up inflation and make it more volatile, according to the asset manager.
However, soaring government spending and debt levels in the wake of the pandemic also constrain central banks, BlackRock said in its global outlook for next year.
“We see central banks living with higher inflation amid hefty government spending and debt loads,” it said.
Mr Brazier warned that the British economy’s ability to supply goods and services has weakened while geopolitical tensions mean inflation shocks will be more frequent.
He said: “That is a big contrast to the last 20 years, when central banks were constantly trying to push inflation up because all the inflation shots were on the downside. As that flips around, we will have to get used to interest rates over the long run being much higher than they were pre-pandemic.”
It comes as the British Chamber of Commerce (BCC) warned that investment in the UK will slump next year as a record rise in the minimum wage increases costs for businesses.
The BCC has downgraded its forecast for UK business investment next year as companies grapple with higher costs, high interest rates weigh on spending and trade flounders.
Over the summer, it had forecast a 0.1pc contraction in 2024. Now, it expects business investment will shrink by 0.8pc.
This will be a stark contrast to the 5.6pc growth recorded across 2023.
Vicky Pryce, chairman of the BCC Economic Advisory Council, said: “The minimum wage increase early next year will further impact investment concerns among businesses, as cost pressures rise.”
Last month, Jeremy Hunt, the Chancellor, announced a record increase to the National Living Wage, worth more than £1,800 per year for a full-time worker. He also raised minimum wage rates for 18 to 20-year-olds. Altogether, this will increase the costs of employing 2.7m workers from April 2024.
Businesses are also grappling with EU red tape. Exports will rise by just 0.5pc next year, following a 0.5pc contraction across 2023, the BCC said.
The BCC now expects the UK economy will grow by 0.4pc next year. This is up slightly from its previous forecast of 0.3pc growth, but it has downgraded its forecast for 2025 from 0.7pc to 0.6pc.